Oil Market Report - July 2023

• Global oil demand is projected to climb by 2.2 mb/d in 2023 to reach 102.1 mb/d, a new record. However, persistent macroeconomic headwinds, apparent in a deepening manufacturing slump, have led us to revise our 2023 growth estimate lower for the first time this year, by 220 kb/d. Buoyed by surging petrochemical use, China will account for 70% of global gains, while OECD consumption remains anaemic. Growth will slow to 1.1 mb/d in 2024.
• World oil supply rose 480 kb/d to 101.8 mb/d in June but is set to fall sharply this month as Saudi Arabia makes a sharp 1 mb/d voluntary output cut. For 2023, global production is forecast to increase by 1.6 mb/d to 101.5 mb/d, as non-OPEC+ expands by 1.9 mb/d. In 2024, global supply is set to rise by 1.2 mb/d to a new record of 102.8 mb/d, with non-OPEC+ accounting for all of the increase.
• Refinery crude throughput estimates for 2023 and 2024 have been raised by 130 kb/d and 90 kb/d, respectively, to 82.5 mb/d and 83.5 mb/d. Higher Russian crude runs and the start-up of new refining capacity underpin the revision. Refining margins remain robust, with very strong Atlantic Basin gasoline cracks and rapid gains in diesel, jet fuel and fuel oil more than offsetting weak naphtha cracks.
• Russian oil exports fell 600 kb/d to 7.3 mb/d in June, their lowest since March 2021. Estimated export revenues plunged by $1.5 bn to $11.8 bn – nearly half the levels of a year ago. Moscow has promised a further 500 kb/d cut to exports from August to stem declining prices and revenues, but may hold production steady as domestic oil demand rises seasonally.
• A substantial 44.2 mb build in non-OECD countries, led by a surge in China, pushed global observed oil inventories up by 19.4 mb in May to the highest since September 2021. By contrast, OECD oil stocks drew by a marginal 1.8 mb. Oil on water declined by 23 mb as additional OPEC+ output cuts saw seaborne oil exports falling to their lowest since January. Preliminary data show a 9.2 mb draw in June.
• Amid range-bound trading, ICE Brent futures fell by $1/bbl m-o-m in June to $75/bbl, as hawkish central bank policies continued to weigh on investor sentiment. Additional voluntary cuts by some OPEC members and a weaker US dollar failed to dispel the macro gloom. Asian crude benchmark Dubai outperformed WTI and Brent, as a tight East of Suez sour crude market contrasted sharply with a comfortably supplied Atlantic Basin. At the time of writing, Brent was trading around $78/bbl.
  

Benchmark crude oil prices traded in a narrow range in June as persistent economic woes overshadowed deepening supply cuts from some OPEC+ countries. Amid an overall slackening in oil demand growth, China’s widely anticipated reopening has so far failed to extend beyond travel and services, with its economic recovery losing steam after the bounce earlier in the year. North Sea Dated hovered around $75/bbl for the month, marginally below May levels and a staggering $49/bbl less than a year ago. At the time of writing, the North Sea benchmark had inched up to $80/bbl. 

Lower production from Saudi Arabia and core OPEC+ members since production cuts were first implemented last November has so far been offset by higher output from other producers. In June, global oil supply was a mere 70 kb/d below October levels just before the first round of OPEC+ cuts kicked in. Iran, exempt from cuts due to sanctions, ramped up production by 530 kb/d over the same period, reaching a five-year high. At the same time, output recovered in Kazakhstan and Nigeria. Outside of the alliance, supply from the United States rose by 610 kb/d as natural gas liquids output surged to all-time highs while biofuels increased seasonally. But global supply could tumble by more than 1 mb/d this month as Riyadh implements steeper cuts. The Kingdom’s crude output is set to plunge to a two-year low of around 9 mb/d in July and August, leaving it trailing behind Russia as the bloc’s top crude producer. 

World oil demand is coming under pressure from the challenging economic environment, not least because of the dramatic tightening of monetary policy in many advanced and developing countries over the past twelve months. Growth in 2023 has been revised down for the first time this year, to 2.2 mb/d from 2.4 mb/d expected previously, with China poised to account for 70% of the total. While Chinese demand growth continues to surprise to the upside, a surge in domestic petrochemical activity has undermined steam cracker margins and activity elsewhere. Demand in the OECD, and Europe in particular, is languishing amid a grinding slowdown in industrial activity. African countries have seen imports and demand decline by higher retail fuel prices after subsidies were dismantled. Even so, global oil demand is set to rise seasonally by 1.6 mb/d from 2Q23 to 3Q23, and to average 102.1 mb/d for the year as whole. Growth will slow to 1.1 mb/d in 2024, as the recovery loses momentum and as ever-greater vehicle fleet electrification and efficiency measures take hold.

Global observed oil inventories look relatively comfortable, having recovered to their highest level since September 2021. OECD industry stocks rose by 170 kb/d in May. At the same time, China posted its largest monthly increase in crude stocks in a year, at a steep 1.1 mb/d, fuelled by a sharp rise in crude oil imports and despite near-record refinery throughput rates. China’s recent buying spree included heavily discounted Russian and Iranian barrels. Global oil balances imply a marginal stock build in 2Q23. But with the surplus mostly in Chinese crude and US LPG tanks, ongoing draws in oil on water and deeper supply cuts starting this month suggest the oil market may soon see renewed volatility.