EU To Downgrade Growth Forecast Due To ‘Stagflationary Shock’ From Iran War

The European Union will cut its growth forecast as a result of the “stagflationary shock” from the Iran war, its economy commissioner said.

Speaking to CNBC, Valdis Dombrovskis, European Commissioner for Economy and Productivity said the block has a narrow margin of action.

“We think it’s important that the support measures we take are temporary and targeted, not ones which actually sustain high demand for fossil fuels,” he said.

Dombrovskis went on to say that the bloc’s release of strategic oil reserves is “ongoing” and there are some concerns about shortages.

“The more protracted the conflict becomes, the more risk of some supply bottlenecks, which reinforces our message that policy response should not increase demand for fossil fuels,” he added.

International Energy Agency Fatih Birol warned that commercial oil inventories are being quickly depleted and there are only a few weeks worth left of them as a result of the war.

Speaking to reporters in the sidelines of the G7 finance leaders meeting in Paris, Birol said the release of reserves has been adding 2.5 million barrels of oil per day to the market, but they “are not endless.”

Birol went on to say that there was a large surplus of reserves before the war began, but the situation has now shifted drastically. “We should ‌be ⁠aware of the fact that it is declining rapidly,” Birol added.

Overall, more than a billion barrels of oil have not been produced since the conflict began in late February, according to the International Energy Agency’s latest update. The figure amounts to about 14 million barrels per day.

“With global oil inventories already drawing at a record clip, further price volatility appears likely ahead of the peak summer demand period,” the IEA said. It also noted that the gap between the supply and demand is narrower because the market had a surplus heading into this year, the group noted.

OPEC also noted that oil production fell more than 30% since the beginning of the Iran war. In its latest monthly update, OPEC also lowered its demand growth forecast for the year to about 1.2 million barrels per day, compared to 1.4 million from the last report.

The cartel’s production dropped by 1.7 million of barrels per day. It has plunged by almost 10 million barrels per day since the war began.

The cartel last week this month agreed to a modest increase in oil production for June as the group continues adjusting output.