Oil Market Report - April 2023

• World oil demand will climb by 2 mb/d in 2023 to a record 101.9 mb/d. Reflecting the widening disparity between regions, non-OECD countries, buoyed by a resurgent China, will account for 90% of growth. OECD demand, dragged down by weak industrial activity and warm weather, contracted by 390 kb/d y-o-y in 1Q23, its second consecutive quarter of decline. Jet/kerosene accounts for 57% of 2023 gains.
• Extra cuts by OPEC+ will push world oil supply down 400 kb/d by end-2023. From March-December, gains of 1 mb/d from non-OPEC+ fail to offset a 1.4 mb/d decline from the producer bloc. For the year as a whole, global oil production growth slows to 1.2 mb/d versus 4.6 mb/d in 2022. Non-OPEC+, led by the US and Brazil, drives the 2023 expansion, rising 1.9 mb/d. OPEC+ is expected to drop by 760 kb/d.
• Global refining throughput is forecast to average 82 mb/d this year, 0.1 mb/d lower than in last month's Report due to weaker 1Q23 data. Annual gains will double to 2.1 mb/d from 1Q23 to 2Q23, as runs in the US normalise and with Chinese activity materially higher than a weak 2Q22 baseline. On average, 2023 crude runs will approach pre-covid levels but remain 0.3 mb/d below 2019 average throughputs.
• Russian oil exports in March soared to the highest since April 2020 thanks to surging product flows that returned to levels last seen before Russia invaded Ukraine. Total oil shipments rose by 0.6 mb/d to 8.1 mb/d, with products climbing 450 kb/d m-o-m to 3.1 mb/d. Estimated oil export revenues rebounded by $1 billion to $12.7 billion but were 43% lower than a year ago.
• Global inventories held largely steady in February after surging by 58 mb in the previous month. Oil on water and non-OECD stocks fell by 11.5 mb and 2.1 mb, respectively, while total OECD inventories rose by 8.8 mb. OECD commercial stocks built by 9.6 mb, narrowing the deficit against the five-year average to 7.5 mb. Preliminary data for the US, Europe and Japan show a hefty 38.9 mb decline in March.
• ICE Brent oil futures slumped to a 15-month low of $71/bbl in mid-March due to financial market instability but then recovered as banking stress waned and expectations of Federal Reserve interest rate cuts later this year increased. Surprise OPEC+ production cuts announced in early April added further momentum to the rebound. At the time of writing, Brent futures traded at $87/bbl.
  

Surprise OPEC+ supply cuts announced on 2 April risk aggravating an expected oil supply deficit in 2H23 and boosting oil prices at a time of heightened economic uncertainty, even as industrial activity slows in the world’s largest economies and production growth outside the alliance appears robust. The bloc’s self-described “precautionary move” immediately triggered a $7/bbl jump in North Sea Dated crude to $85/bbl, up nearly $15/bbl from March lows.

The apparent weakness in industrial activity is impacting gasoil demand, whereas the services sector and personal consumption are driving gasoline and jet uptake. While gasoil cracks have eased, those for gasoline continue to trend higher. Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly. This augurs badly for the economic recovery and growth.

The latest OPEC+ voluntary curbs of 1.16 mb/d come on top of an announced 500 kb/d cut in Russian output from March that has now been extended through the rest of the year, and a 2 mb/d reduction in targets taking effect last November. While apparently a move to support declining prices amid financial turmoil in mid-March, rising global oil stocks may have also contributed to the decision. In January, OECD industry stocks surged by 53 mb to 2 830 mb, the highest since July 2021 and only 47 mb below the five-year average. Preliminary data for February show further builds, albeit at a much slower pace. By March, however, the trend was already turning, with OECD industry stocks plunging by 39 mb – their biggest monthly decline in over a year.

While oil demand in developed nations has underwhelmed in recent months, slowed by warmer weather and sluggish industrial activity, robust gains in China and other non-OECD countries are providing a strong offset. In 1Q23, OECD oil demand fell 390 kb/d y-o-y, but a solid Chinese rebound lifted global oil demand 810 kb/d above year-earlier levels to 100.4 mb/d. A much stronger increase of 2.7 mb/d is expected through year-end, propelled by a continued recovery in China and international travel. For 2023 as a whole, world oil demand is forecast to rise by an average 2 mb/d, to 101.9 mb/d, with the non-OECD accounting for 87% of the growth and China alone making up more than half the global increase.

Meeting those gains may prove challenging as the new OPEC+ cuts could reduce output by 1.4 mb/d from March through year-end, more than offsetting a 1 mb/d increase in non-OPEC+ production. Growth from the US shale patch, traditionally the most price-responsive source of more output, is currently limited by supply chain bottlenecks and higher costs.

Our oil market balances were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge. The latest cuts risk exacerbating those strains, pushing both crude and product prices higher. Consumers currently under siege from inflation will suffer even more from higher prices, especially in emerging and developing economies.