Short-Term Oil Market Outlook: Prospects, Risks and Uncertainty
New OIES presentation – Short-Term Oil Market Outlook: Prospects, Risks and Uncertainty.
- The market is torn between a bullish micro-oil story and a bearish macro story. This is exacerbated by potential government intervention (price caps, embargoes, talks of restrictions of US products exports) and macroeconomic measures (aggressive tightening of monetary policy). Volatility also reflects tightness in some segments of the market particularly in the refining sector and the low levels of middle distillates stocks.
- The key elements of the bullish micro-oil story are based on expectations of larger Russian crude and products disruptions; end of crude stock releases from SPR; OPEC+ role in balancing the market; moderate non-OPEC supply growth due to underinvestment; geopolitical risks outside Russia; and limited buffers in the system to deal with outages.
- The bearish macro story is based on fears of a global economic recession with big negative impacts on oil demand and with no signs that China will alter its zero COVID-policy anytime soon; and some micro-oil factors such as expectation of limited Russian supply disruption, continued release of stocks from SPR, high US shale response, and until recently potential full return of Iran oil supplies.
- Prospect of Russian supply disruption is a key factor shaping market expectations and the bullish story. So far, disruption of Russian crude production has been limited and well below initial expectations at the start of the Russia-Ukraine war. Despite this limited disruption, there has been massive transformation in global crude and products trade flows.
- Products markets are tight and diesel stocks in Europe are below the 5-year average. The decline in Russian products exports to Europe; the loss in refining capacity in some parts of the world; maintenance and the strikes that paralyzed French refining sector are all factors contributing to this tightening and to the sharp swings in diesel margins. A key question is whether China’s refineries will increase its exports of products and ease the pressure on diesel markets after China has set its latest batch of oil products export quotas for 2022.
- Another key factor shaping expectations is the downgrading of global growth prospects and the potential impact on oil demand. Global oil demand growth is now forecast at 1.8 mb/d in 2022 and 1.7 mb/d in 2023.
- On implied balances, the market has shifted from deficit to surplus in Q3 2022. Weaker demand growth, limited supply disruption, and robust supply particularly from key OPEC countries alongside release of crude from the SPR all contributed to this shift.
- Reference forecast for Brent stands at $100.8 in 2022 and $94/b in 2023, but the balance of risks in 2023 is skewed on the downside dominated by negative demand pressures (-$6/b on annual terms) and the price band ranges between $77.8/b and $104.3/b.