Oil Market Update: Demand Destruction on Its Way

To date, there have been no disruptions to the flow of Russian oil as we expected. Nonetheless, prices have risen as non-energy sanctions have made it more difficult for Western customers to transact for Russian oil. (See our pre-invasion note, "What the Ukraine Crisis Means for Oil Prices.")

As a result many are "self-sanctioning," avoiding buying Russian oil, forcing it to discount and reroute to willing buyers. This adds cost and puts pressure on benchmark prices. With an immediate OPEC or U.S. driller supply response unlikely, an Iran deal or demand destruction are the only real options to relieve price pressure.

But the latter might take higher prices, meaning a 2008 type spike isn't off the table unless a deal is struck. In July 2008, oil prices spiked to a record $147/barrel on supply concerns and surging demand from China. To account for demand destruction, we have reduced our 2022 global consumption forecast by 600 thousand barrels a day, but at 100.0 million b/d, our outlook still exceeds prepandemic levels. We previously expected inventory builds in the second half of the year to result in prices moderating. Prices are now likely to be dictated by the OPEC+ response, U.S. driller activity, and any Iran deal.

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