Do concerns over a fragile world economy outweigh oil supply fears?

Though not the end-all-be-all for gauging the broader market, the S&P 500 is down 10.4 percent since the start of the year, while the S&P Energy Index is up 37.2 percent.

The weakness in that financial index reflects growing concerns about the economic outlook because of a range of issues. Our sense is the list includes inflation worries, rising interest rates, persistent supply chain pressures, ramifications from Russia’s invasion of Ukraine and related fears about Eurozone impacts.

However, our analysis of various gauges for the oil market suggests that underlying sentiment remains distinctly bullish. This constructive slant happens to coincide with our own forecast for the oil market outlook, but that is not the focus here. What is in focus is the list of the fundamental factors fostering such a constructive oil market undertone.

Leaving aside the fact that global petroleum inventories are at seven-year lows and that we saw drawdowns this year following the all-time record draw in 2021, we are still staring down the barrel of a potentially cataclysmic loss of Russian oil supply. There has been plenty of speculation about the scope of Russian output shut-ins, but we are still waiting on credible data to assess the actual impact of sanctions and self-imposed embargoes.

The math about the potential impact of Russian oil production losses leads the market down a path of a much bigger inventory draw than we have been forecasting — a draw which runs sharply at odds with the consensus projection for global inventories to swell this year. You may recall that consensus forecasts knew oil inventories were going to build in 2021 — and, of course, just the opposite occurred.

If oil supply losses run as high as three million barrels per day for the last nine months of the year — which is what the International Energy Agency projected — the effect would be 825 million barrels taken out of the chain. This is more than 500 million barrels larger than the total emergency stock release announced by nations that make up the Organization of Economic Cooperation and Development in recent months.

If we consider a scenario in which Russia’s supply shut-ins are just 50 percent of the IEA’s projection, the 412 million barrels lost to global non-Organization of the Petroleum Exporting Countries output still outstrips all of the OECD’s emergency stock release by almost 100 million barrels. This additional drain on inventories would come on top of the draw we already forecast will occur — a view that runs against consensus projections.

While there is clearly angst about the economic picture and potentially slower growth in oil demand, the additional tightening we see for the global oil balance appears to be a shared concern with a broader swath of oil market participants. Because petroleum stockpiles and oil prices have an inverse relationship, the prospect of additional inventory draws points toward additional upward oil price pressure over the medium term.

This feeds into our separate but related forecast for energy equities to continue to advance, on an absolute and relative basis.

• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.