Oil Market Report - June 2023

• World oil demand will grow by 2.4 mb/d in 2023 to 102.3 mb/d, a new record. China’s rebound continues unabated, with its oil demand reaching an all-time high of 16.3 mb/d in April. The non-OECD accounts for 90% of gains this year, as OECD demand remains lacklustre amid the current manufacturing slump. An increasingly adverse macroeconomic climate will act as a headwind in 2024, and as the post-pandemic recovery will largely have run its course, oil demand growth is set to slow to 860 kb/d.
• Non-OPEC+ leads world supply growth through next year, adding 1.9 mb/d in 2023 and 1.2 mb/d in 2024. As for OPEC+, total oil output in 2024 is set to decline by 200 kb/d as production curbs are carried through the year. Total oil supply is forecast to reach record high levels of 101.3 mb/d this year and 102.3 mb/d next year. In May, world oil supply fell by 660 kb/d to 100.6 mb/d after extra cuts from some OPEC+ producers kicked in. Saudi Arabia has promised to curb output by a further 1 mb/d in July.
• Russian oil exports dropped by 260 kb/d in May to 7.8 mb/d, largely unchanged from a year ago. Crude oil exports rose by 90 kb/d to 5.2 mb/d while product exports slumped by 350 kb/d to 2.6 mb/d. China and India accounted for at least 56% of total Russian exports, while shipments to Africa, the Middle East and Latin America made up another 12%. Estimated export revenues fell by $1.4 bn to $13.3 bn, down 36% on a year ago, with average crude prices easing from $60/bbl in April to $55/bbl in May.
• Global refinery throughputs are forecast to increase by 1.8 mb/d in 2023 and 1 mb/d next year when it averages 83.4 mb/d. A further decline in OECD crude runs next year is more than offset by the 1.3 mb/d increase in non-OECD activity. New capacity in Oman and Kuwait and ample availability of discounted Russian crude in Asia skews activity away from the Atlantic Basin. Refinery margins were stable in May, with gains in Atlantic Basin light distillates partially offset by weaker middle distillates.
• Global observed oil inventories rose by 10 mb in April as a 15.9 mb decline in oil on water and a 1.1 mb drop in non-OECD stocks partly offset a 27 mb build in OECD stocks. OECD industry stocks rose by 33.6 mb but were still 86.4 mb lower than the five-year average. Preliminary May data show a further stock build in OECD countries of 21.1 mb.
• North Sea Dated fell by around 10% in May compared with April amid growing concerns about the impact of hawkish central bank policies on the global economy. Attesting to oil’s bear market, the current ICE Brent future price of around $73/bbl is $50/bbl below summer 2022’s peak. Saudi Arabia’s announcement of deeper output cuts in early June was unable to stem the decline.
  

Oil markets are struggling for direction as conflicting data points cloud the outlook. Bearish macroeconomic indicators and concerns over demand growth are clashing with resurgent oil use in key consuming countries. Oil prices appear to be taking their cue from the former, with benchmark North Sea Dated trading at $73/bbl - nearly half the high of 2022 - despite a looming supply deficit.

Global oil demand continues to defy the challenging macroeconomic climate and is set to rise by 2.4 mb/d in 2023, outpacing last year’s 2.3 mb/d increase as well as earlier expectations. China accounts for 60% of the gains, with soaring transport and petrochemical use propelling apparent demand in April to an all-time high of 16.3 mb/d. Indian demand is equally robust with the latest readings for May showing both gasoline and diesel breaking records.

By contrast, OECD demand remains lacklustre amid an ongoing manufacturing slump and generally subdued economic growth. Having spent 4Q22 and 1Q23 in contraction, the OECD returns to muted growth in 2Q23, with the US driving season getting off to a strong start. In advanced and developing economies alike, rebounding air traffic is consolidating jet/kerosene’s position as the main contributor to global 2023 demand gains (1.1 mb/d).

While oil demand is expected to continue to rise, both seasonally and structurally over the remainder of the year, only a marginal increase in supply is foreseen. In May, world oil production fell by 660 kb/d to 100.6 mb/d. Deeper cuts from some OPEC+ producers kicked in while output from Iraq’s northern Kurdish region and some Canadian oil sands remained shut in. Saudi Arabia, with its voluntary cut of 500 kb/d agreed in April, led the monthly drop in world supply, but the overall decline was stemmed by a seasonal 330 kb/d rise in biofuels along with higher flows from Nigeria and elsewhere. The Kingdom has promised to slash output by a further 1 mb/d in July to a two-year low of 9 mb/d. Riyadh made the pledge at the 4 June OPEC+ meeting that rolled over the bloc’s existing curbs through 2024 and readjusted some targets to better reflect actual supply.

With the post-Covid rebound having largely run its course, global demand growth is set to decelerate to 860 kb/d next year. The impact of the unprecedented monetary policy tightening can further curtail activity and limit advanced economies to a second year of subpar growth in 2024. Combined with improved vehicle efficiencies and widespread teleworking, this will push OECD deliveries into decline. Conversely, non-OECD oil use will continue to expand. On a global level, petrochemical feedstocks will replace jet fuel as the main driver, accounting for half of the total gain.

Supply growth, too, is forecast to lose momentum next year – rising 1 mb/d compared to 1.4 mb/d in 2023. The United States continues to dominate non-OPEC+ supply increases, but gains are set to ease from 1.9 mb/d to 1.2 mb/d in 2024 as growth halves in the US shale patch. While the adjustments to individual OPEC+ member targets will not materially impact production this year, the extension of quotas through 2024 means that, following a 470 kb/d decrease this year, OPEC+ output could fall a further 200 kb/d next year. Altogether, this could leave the market in deficit in 2024, with the second half looking particularly tight.