Issue 22

Authors: OIES,

OIES Oil Monthly – Issue 22

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

– The oil market outlook in 2023 remains dominated by two main swing factors: the prospects of the global economy and the extent of Chinese demand rebound; and the potential impacts of EU sanctions and G7 price cap on Russian oil supplies. Since the start of the year, market expectations have been leaning towards the bullish narrative with the consensus pointing towards large disruptions in Russian supplies with crude production contracting y/y by around 1 mb/d in 2023 and a strong comeback of Chinese demand later in the year with hefty growth numbers put forward for 2023 of around 900,000 b/d and 1 mb/d. But as we nearly move past Q1, Russian supplies remain resilient, while confidence over China’s economic rebound and support policies remains volatile. Moreover, stickier than expected inflation and expectations of further monetary policy tightening continue to put pressure on oil prices, though the recent collapse of SVB and stresses in the banking system have caused some to revise these expectations in favor of lower interest rate hikes. Until the impacts of these factors are fully filtered through, volatility will remain the name of the game.

– Expectations over Russia’s supply disruptions remain little changed this month, with Russian crude production projected to decline by 510,000 b/d to 10.2 mb/d in 2023, from 10.7 mb/d in 2022. As the EU crude and products sanctions on Russian oil imports are now in full force, we expect the losses in pipeline crude and products exports to reach y/y at 680,000 b/d. These however will be partially offset by seaborne crude flows that are expected to hold near 2019 levels and grow y/y by 160,000 b/d to 3.51 mb/d from 3.35 mb/d in 2022.

– Global oil demand growth outlook is revised slightly higher to 1.7 mb/d in 2023, from 1.6 mb/d anticipated previously. The global demand outlook in 2023 continues to see small upticks with macro pressures persisting in the near-term, but the perceived risks become more balanced in H2 uplifting the low/high range between 1.2 mb/d and 2.1 mb/d. China’s ‘pro-growth’ policies to support its economic recovery remain subject to important headwinds pointing towards a slow and bumpy economic recovery ahead. This has led us to maintain our below-consensus of 680,000 mb/d demand growth forecast for China for 2023.

– Global oil supply growth for 2023 remains unchanged at 1.6 mb/d. Higher than previously anticipated output from Russia in Q1 is seen offsetting weaker expectations for non-OPEC crude growth outside OPEC+ led by the US. Reduced shale activity has led us to downgrade the US crude supply outlook by 90,000 b/d to 740,000 b/d in 2023.

– Refining margins remain near their post-war lows –albeit keeping at historically high levels– as product stocks particularly to Europe built very quickly in the months leading to the EU embargo on Russian product imports, US refinery runs continue to slowly recover, products from East of Suez find their way in Europe, and demand in Europe remains depressed. Product markets and prices however could see pressures fast returning as the spring maintenance season is underway amid constrained supplies, renewed concerns over EU refinery strikes, and product stocks remain well below their 5-year average.

– Our Reference forecast for Brent is slightly downgraded by $1.1/b to $94.6/b in 2023, from $95.7/b previously. The resilience of Russian supplies in January/February overshooting expectations despite the EU sanctions have pushed our reference price lower by $2/b in Q1, but the outlook strengthens again and converges with previous expectations from Q2-onwards as balances become tighter. The balance of risks for 2023 remains tilted to the downside by -$4/b, but negative risks are seen easing significantly in H2. The price band for the year ranges between $81.4/b and $103.9/b.

– We continue to forecast that the oil market will remain near balance in 2023, building a small 90,000 b/d surplus. We expect the oil market to build large surpluses in H1 of 1.2 mb/d and these to be offset by a -1.1 mb/d deficit in H2 as Chinese demand is expected to pick-up and Russian disruptions settle in. The supply/demand gap in 2023 ranges between -0.7 mb/d and 1.1 mb/d, while the recent OECD stockbuilds could reverse sooner than expected.