Oil Market Report - November 2022

• Demand growth will slow to 1.6 mb/d in 2023, down from 2.1 mb/d this year, as mounting economic headwinds impede gains. The GDP outlook has worsened and 4Q22 global oil use will contract (-240 kb/d) compared with last year. China’s persistently weak economy, Europe’s energy crisis, burgeoning product cracks and the strong US dollar are all weighing heavily on consumption.
• World oil supply rose 410 kb/d in October to 101.7 mb/d but is forecast to fall by 1 mb/d for the remainder of the year as OPEC+ cuts and an EU ban on Russian crude come into effect. Annual growth of 4.6 mb/d this year is set to boost global production to 99.9 mb/d. Modest gains of just 740 kb/d in 2023 will push supply to 100.7 mb/d.
• Global refinery throughputs in October fell by 500 kb/d m-o-m to 80.4 mb/d, with a 1.1 mb/d decline in the Atlantic Basin partly offset by higher runs East of Suez. New refinery capacity coming online will go some way to offset potential losses from Russia. Refinery runs are forecast to increase by 2.3 mb/d in 2022 and 1.4 mb/d next year. Diesel cracks surged to new records, keeping margins at elevated levels.
• Russian oil exports rose by 165 kb/d to 7.7 mb/d in October as shipments to the EU, China and India held up and lower flows to Türkiye were more than offset by increases to yet to be identified destinations. Crude oil exports to the EU crude were 1.5 mb/d, 1 mb/d below pre-war levels. Product exports were down 300 kb/d, to 1 mb/d, including 600 kb/d of diesel. Export revenues rose by $1.7 bn to $17.3 bn.
• Global observed inventories fell by 14.2 mb in September as OECD and non-OECD stocks plunged by 45.5 mb and 19.3 mb, respectively, but were partially offset by a surge in oil on the water of 50.6 mb. OECD industry oil stocks declined by 8 mb, while government stocks drew by 37.4 mb. OECD total oil stocks fell below 4 000 mb for the first time since 2004.
• In October, North Sea Dated posted its first increase in four months, rising $3.35/bbl to $93.11/bbl as signs of a tight market prevailed over economic uncertainty. Oil prices remain about 30% below their June peak. Brent backwardation weakened slightly while open interest continued to languish near seven-year lows. Freight rates rose on higher exports and as the shift away from Russian barrels increased tension on available fleet capacity.

Oil markets remain finely balanced going into the winter months, with OECD stocks trending at the lowest levels since 2004. The approaching EU embargoes on Russian crude and oil product imports and a ban on maritime services will add further pressure on global oil balances, and, in particular, on already exceptionally tight diesel markets. A proposed oil price cap may help alleviate tensions, yet a myriad of uncertainties and logistical challenges remain.

Diesel prices and cracks (differential to crude oil price) surged to record levels in October, and are now 70% and 425% higher, respectively, than year-ago levels while benchmark Brent prices increased just 11% during the same period. Distillate inventories are at multi-decade lows. French refinery strikes last month and upcoming embargoes propelled diesel prices in Rotterdam, Europe’s main trading hub, to more than $80/bbl above North Sea Dated at one point, before easing somewhat. Diesel premiums in the United States have also soared ahead of the winter heating season in the Northeast.

High diesel prices are fuelling inflation, adding pressure on the global economy and world oil demand, which is now expected to contract by 240 kb/d in 4Q22. Demand is forecast to expand by 2.1 mb/d in 2022 before slowing to 1.6 mb/d next year. Growth will come from jet fuel and LPG/ethane for petrochemicals. But global diesel/gasoil growth is forecast to ease from 1.5 mb/d in 2021, to 400 kb/d in 2022 before posting a small decline in 2023 under the weight of persistently high prices, a slowing economy and despite increased gas-to-oil switching.

Diesel markets were already in deficit before Russia’s invasion of Ukraine due to the closure of 3.5 mb/d refinery distillation capacity since the start of the Covid-19 pandemic, resulting in a net decline of 1 mb/d. With the post pandemic recovery in 2021, demand jumped for diesel and gasoil - the main engines of industrial activity and economic growth. Lower Chinese product exports also tightened the market, but a recent change in policy is making more diesel available. A net 2.7 mb/d of new distillation capacity is slated to come online globally from 4Q22 to end-2023, which could offset lower exports from Russia following the embargo.

By October, EU countries had reduced Russian crude oil imports by 1.1 mb/d to 1.4 mb/d, and diesel flows by 50 kb/d to 560 kb/d. When the crude and product embargoes come into full force in December and February, respectively, an additional 1.1 mb/d of crude and 1 mb/d of diesel, naphtha and fuel oil will have to be replaced. For crude oil, no significant buying from Russia outside China, India, and Türkiye has appeared despite massive discounts. A further rerouting of trade should help ease pressures but a shortage of tankers is a major concern, especially for ice-class vessels required to load out of Baltic ports during winter.

The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers. Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear.