China oil demand must remain weak or we will have tough summer: IEA

The executive director of the International Energy Agency spoke of the current challenges facing global oil markets on Monday, highlighting the significant influence Chinese demand could have over the next few months.

In an interview with CNBC at the World Economic Forum in Davos, Switzerland, Fatih Birol painted a stark picture of the current situation, describing oil prices as being “very high.”  

“They are risky for economic recovery around the world, but especially in the importing countries in the emerging world,” he said. “It’s a big risk, together with the food prices being very, very high, and I think that it may well trigger us, the world … step by step to a recession.”

With geopolitical tensions elevated following Russia’s invasion of Ukraine and continued concerns about supply casting a shadow over oil markets, the price of Brent crude currently sits at around $113 a barrel.

Looking ahead, Birol went on to lay out some of the challenges markets may face in the coming months.

“I very much hope that the increase coming from [the] United States, from Brazil, Canada this year, [will] be accompanied by the increase coming from the key producers in Middle East and elsewhere,” he said.

“Otherwise, we have only one hope that we don’t have big trouble in the oil markets in summer, which is hoping … that the Chinese demand remains very weak.”

Chinese oil demand weakened in recent months as the country imposed a number of stringent lockdowns in a bid to curb the spread of Covid-19.

If China went back to the usual oil consumption and oil demand trends, “then we will have a very difficult summer around the world,” Birol said.

During his interview with CNBC, Birol was also asked about the “enormous” profits being made by a lot of hydrocarbon based companies — as well as exploration companies — and what should be done with them.

His response illustrated the intricacies of the global energy transition and the competing challenges that will need to be balanced in the years ahead.

“In the last five years, on average, [the] oil and gas industry made revenues [of] about $1.5 trillion,” he said.

“And this year, from 1.5 it will go to 4 trillion U.S. dollars, more than two times increase in the oil and gas companies’ revenues.”

It was not only businesses that were making money, he added, namechecking countries such as Saudi Arabia, Iraq, Iran, Russia, Angola and Nigeria.

“Of course, money should go, in my view, to replace the Russian oil and gas, in terms of the traditional assets,” Birol said.

“But I very much hope that money also goes to clean energy, clean and secure energy technologies, ranging from solar, wind, carbon capture and storage, hydrogen.”

“We are [responding to] … this immediate crisis,” Birol said. “But our response should not lock in our energy infrastructure to a terrible world which is much, much hotter than today and with a lot of problems — extreme weather events and so on.”