Oil Market Report - February 2023

• Following a modest year-on-year contraction in 4Q22, global oil demand is set to rise by 2 mb/d in 2023 to 101.9 mb/d. The Asia-Pacific region (+1.6 mb/d), fuelled by a resurgent China (+900 kb/d), dominates the growth outlook. The reopening of borders will boost air traffic. Jet/kerosene demand is expected to increase by 1.1 mb/d to 7.2 mb/d, 90% of 2019 levels.
• World oil supply held largely steady in January, at around 100.8 mb/d. The pause comes after a sharp 1.2 mb/d decline at the end of 2022 led by the US and Saudi Arabia. We expect global output to grow 1.2 mb/d in 2023, driven by non-OPEC+. Supply from OPEC+ is projected to contract with Russia pressured by sanctions.
• Global refinery throughputs fell 730 kb/d in January, with US activity still recovering from the outages during the Arctic freeze. A further decline is expected in February on scheduled maintenance. Despite mild weather in Europe and a seasonal slowdown in road demand, product cracks rallied on supply concerns in the US and ahead of the EU embargo on Russian products coming into force.
• Russian oil exports rose to 8.2 mb/d in January ahead of the EU embargo and G7 price cap on refined products taking effect. Crude oil exports increased by nearly 300 kb/d m-o-m, despite a further 450 kb/d decline in shipments to the EU. Product loadings held steady at around 3.1 mb/d. Export revenues are estimated at $13 bn, marginally higher than in December but down 36% on a year ago.
• Global observed oil inventories tumbled by 69.8 mb m-o-m in December, but were 40.5 mb higher than a year ago and 126 mb above the low reached in March 2022. OECD industry stocks fell by 18.1 mb in December to 2 767 mb, 95.7 mb below the five-year average. Preliminary data for the US, Europe and Japan show a build of 28 mb in January, led by US crude and gasoline stocks.
• North Sea Dated rose by $2.50/bbl m-o-m to $82.86/bbl in January, its first monthly increase since October, as economic sentiment marginally improved following China’s reopening. Forward curves and physical differentials were largely stable, except for in the US where refinery outages propelled gasoline margins higher, while at the same time weighing on WTI prices. Freight rates fell across the board.
  

Nearly a year on from Russia’s invasion of Ukraine, global oil markets are trading in relative calm. Oil prices are back to pre-war levels with the exception of diesel, though even these have drifted much lower from last summer’s historical highs. World oil supply looks set to exceed demand through the first half of 2023, but the balance could quickly shift to deficit as demand recovers and some Russian output is shut in.

Russian oil production and exports have held up relatively well despite sanctions. The country has managed to reroute shipments of crude to Asia and the G7 price cap on crude appears to be helping to keep the barrels flowing. In January, output was down only 160 kb/d from pre-war levels, with a lofty 8.2 mb/d of oil shipped to markets. But in a sign that Moscow may be struggling to place all of its barrels, Deputy Prime Minister Alexander Novak said in early February that Russia would curb output by 500 kb/d in March rather than sell to countries that comply with the G7 price caps. 

The cut may be an attempt to shore up oil prices. In January, Moscow was forced to sell exports at a large discount. Their 2023 budget is based on a Urals price of $70.10/bbl, but the grade’s export price averaged just $49.48/bbl in January versus $82/bbl for North Sea Dated. As a result, Russia’s fiscal revenues from oil operations plunged 48% y-o-y in January to 310 billion roubles (or $4.2 bn), while export revenues dropped 36% to $13 billion. 

With Russian oil production in decline and limited gains expected from the rest of the OPEC+ bloc, non-OPEC+ producers will lead world supply growth in 2023. For the year as a whole, global oil supply is forecast to expand by 1.2 mb/d, led by the United States, Brazil, Norway, Canada and Guyana – all set to pump at record rates. OPEC kingpin Saudi Arabia, along with the UAE, will also produce near all-time highs, leaving a thin spare capacity cushion of roughly 3.4 mb/d.

At the same time, world oil demand growth is picking up after a marked slowdown in the second half of 2022 and a year-on-year contraction in the fourth quarter. China accounts for nearly half the 2 mb/d projected increase this year, with neighbouring countries also set to benefit after Beijing ditched its zero-Covid policies. A pronounced uptick in air traffic in recent weeks emphasises the central role of jet fuel deliveries in 2023 growth – expected to soar by 1.1 mb/d to reach 7.2 mb/d, around 90% of 2019 levels. Total demand will hit a record 101.9 mb/d, 1.4 mb/d more than the 2019 average. 

The impact on Russia’s product exports following the EU embargo and price cap that came into effect on 5 February will be a key factor when it comes to meeting that demand growth. So will Beijing’s stance on domestic refinery activity and product exports amid its reopening. New refineries in Africa and the Middle East as well as China are expected to step in to cater for the growth in refined product demand. If the price cap on products is half as successful as the crude cap, product markets may well weather the storm – but more crude supplies would be required to prevent renewed stock draws later in the year.