While the Organization of the Petroleum Exporting Countries and OPEC+ are monitoring the supply of crude oil, the demand is left at the mercy of numerous market forces.
Many international organizations have recently downgraded their economic forecasts for 2022, which will lead to reduced demand for oil.
For example, citing the ongoing fallout from the war in Ukraine, inflation, and the COVID-19 pandemic, the World Bank now expects the global economy will grow by 3.2 percent, compared to the annual forecast of 4.1 percent it made the previous month. Similarly, the World Trade Organization revised its 2022 trade forecast downwards to 3 percent from its previous 4.7 percent prediction, for similar reasons. Since the need for oil is highly correlated with economic activity, many forecasters have also reduced their oil demand projections accordingly.
On top of this, inflation is rising. The consumer price index calculated by the Organization for Economic Co-operation and Development for February suggests that annual inflation in the OECD region rose to 7.7 percent, compared with 7.2 percent the month before, and just 1.7 percent in February 2021. This was the highest rate since December 1990. Also, according to a UN Food and Agriculture Organization report, global food commodity prices surged to their highest levels in March, mainly because the war in Eastern Europe has affected the production of grain and vegetable oil.
Due to the current price of crude oil, fuel prices are rising at filling stations around the world, which should theoretically lead to a slowdown in the demand for oil, if the various factors mentioned above persist over the short term.
The price elasticity of a commodity is a measure of how sensitive the quantity demanded is to the price of that commodity. The price elasticity of crude oil is low, so a rise in prices hardly affects demand. This means that crude oil prices have to change significantly, and remain at the new level for some time before there is a meaningful influence on consumer behavior.
For example, following the 2007 to 2008 financial crisis, crude oil prices rose 29 percent in 2010 compared to 2009 and 40 percent in 2011 compared to 2010, but these increases had a limited impact on its demand. Oil consumption continued to increase, albeit at a slower pace. Pent-up demand in the system usually helps the recovery of demand, especially after an economic slowdown.
Conversely, in 2014, 2015 and 2016, low oil prices stimulated the demand for oil in major oil-consuming countries, especially for transportation. Crude oil prices fell by 47 percent in 2015 compared to 2014, while crude prices fell by 17 percent in 2016 compared to 2015. These drops in prices were large and led to increased oil consumption. However, the decline in the price of consumer goods was more gradual, due to tax increases and subsidy cuts, which vary by country.
The increase in the demand for oil from 2014 to 2016 was mainly due to an increased demand for gasoline and kerosene. In 2017, much of the growth in the demand for oil was driven by the booming petrochemical industry, while demand for diesel was strongly driven by various industries such as construction and trucking.
After its last meeting, OPEC and OPEC+ reiterated their commitment to ensuring the stability of oil markets by providing an adequate supply of crude to world markets. On the other hand, and according to various forecasts, demand is now expected to ease slightly in the coming months given the softer economic outlook compared to projections made earlier in the year, rising inflation, and geopolitical turmoil in Eastern Europe. These factors are uncontrollable and their intensity and duration determine their impact on near-term demand.
However, the demand backlog from previous years due to COVID-19 should mitigate their negative impacts.
Source: Arab News