Issue 17

Authors: OIES,

OIES Oil Monthly – Issue 17

The new issue of OIES Oil Monthly, including our latest short-term oil market outlook to 2023, is now available.

– The resilience of Russian production so far and ability of Russian producers to divert large volumes of crude from Europe to other markets have led us to revise down the size of the expected disruptions in Russian oil production by 240,000 b/d to 630,000 b/d in 2022 and by 500,000 b/d to 1.5 mb/d in 2023. On the lower bound, Russian disruptions are expected to reach near the previous high of 900,000 b/d by year-end and peak at 1.2 mb/d in February 2023, to average 1 mb/d for the year. Considering the confirmation by G7 to review and finalize a price cap measure on Russian oil, this month we also consider a high case scenario under which a price cap is hypothetically imposed in early-December and Russia responds by cutting its production by 3 mb/d compared to pre-invasion levels close to 8.1 mb/d. Both high/low Russian disruption scenarios are included in our balance of risks for this month.

– Global oil demand growth is unchanged to 2.2 mb/d in 2022 and is upgraded to 2.1 mb/d in 2023, from 1.6 mb/d forecast previously. The upgrade in 2023 stems mainly from including in our reference case the assumption that gas-to-oil substitution will lead to 460,000 b/d incremental demand between October 2022 and March 2023. Furthermore, China’s underperformance in Q3 due to the recent COVID flare-ups and strict state-policies against COVID coupled with domestic economic challenges has led us to downgrade Chinese demand growth in 2022 and we now expect a mild contraction by 0.1 mb/d. In 2023, China’s demand growth is forecast to rebound by 0.8 mb/d from 0.4 mb/d previously.

– Global oil supply growth is upgraded to 4.8 mb/d in 2022 from 4.7 mb/d forecast previously and to 1.7 mb/d in 2023 from 1 mb/d. OPEC crude oil output is expected to reach to a new post-pandemic high in Q4, albeit many producers have already reached their maximum capacity. As of August, we estimate that OPEC+ output remained 3.5 mb/d below target production, while since April 2020 that marked the start of the current deal OPEC producers lost 500,000 b/d of productive capacity with African producers alone accounting for a loss of 850,000 b/d. Non-OPEC crude supply outlook improved and is projected to grow by 1.1 mb/d in 2022 and by 0.2 mb/d in 2023, but gains excluding the Russian revisions remain marginal.

– The products markets remain unsettled, with global diesel/gasoil supplies severely tight. Refinery margins bounced back in August, but the latest hike lacked support as tight middle distillate supplies were confronted by weak rebound in Chinese demand amid the possibility of another large batch of products export quotas in October, recession fears in Europe and the US, the so far limited impact on Russian product exports particularly in Europe and a mild start to the US hurricane season. Higher disruptions in Russian exports towards year-end, a strong comeback of Chinese demand in Q4 and high gas-to-oil switching could provide important support in the coming winter months.

– Our Reference forecast for Brent is downgraded by $5.9/b to $105.1/b in 2022 and by $0.6/b to $105.8/b in 2023. For Q4 2022, we expect Brent to bounce back in the $100s supported by supply pressures, demand offsets and thin buffers, and peak in the mid-$110/b in Q1 2023 before retreating again around $100/b for the remainder of the year. The balance of risks this month is further skewed on the downside with supply risks reflecting the extent of Russian disruptions returning in the very near-term, but negative demand risks escalating towards year-end and dominating in 2023. The Brent Prospect that takes into account the uncertainty underlying the outlook edges lower than our reference forecast in both years to $102.6/b in 2022 and $95.8/b in 2023.

– We forecast a 0.3 mb/d surplus in 2022 and a -0.1 mb/d deficit in 2023. The uncertainty engulfing the oil market in 2023 remains elevated reflecting both endogenous supply/demand outcomes that are subject to shocks within the oil market, but also external factors such as policy actions/responses that could impact and change this outcome by generating shocks outside the oil market. This uncertainty is reflected on the global balance risks that show the supply/demand gap in 2023 ranging between -1.9 mb/d and 2.8 mb/d.