Overview: Lack of Direction as Balances Tighten, But Surplus Ahead

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  • The dithering between a lack of supply (higher prices) and lower demand (lower prices) continues. For now, supply has been holding up better than many thought, and demand has been held steady by a soft northern Hemisphere winter. Hence, Brent oil is at $80, well below what seemed a solid $85-$95 price band but a step up from a low of $75 early December. The market’s journey into unknown territory continues. Fundamentals point to a tightening market. Russia is now facing a Feb. 5 EU refined product import ban, which is harder to deal with than the Dec. 5 crude ban: less supply. And China’s relaxation of Covid-19 rules seems to point to more mobility and production: more demand. But balances show a supply surplus through May.

  • The great migration of crude oil and refined product flows continues. Russia keeps crude exports going at high levels thanks to discounts that seem now to move towards $40 per barrel. Urals in the Baltics are selling at around $45/bbl, with the bulk of seaborne crude exports flowing to India and China. Even this discount doesn’t prevent crude stocks from building inside the country. Some Indian cargoes seem to travel on western tankers, which is possible if the oil sells below the G7/EU price cap of $60. But it is unclear how the mechanism works and whether this can be transferred to the refined product market. That is crucial. Even if Russia can find new markets for its products, it needs more tankers since there is not enough non-western tanker capacity.

  • China’s latest loosening of Covid-19 rules can have a big impact on domestic oil consumption and the nation’s need for crude imports, potentially much from Russia. If Beijing continues the new course, China’s oil demand can grow 660,000 barrels per day in 2023. It could be higher if the new, more relaxed Covid-19 policies widen. Unclear is if Beijing would allow its refineries to run at current high levels — well beyond meeting higher domestic demand — and export more refined products. China’s November product exports of 1.6 million b/d were 1.1 million b/d higher than those in September and help alleviate the global product shortage. The world would need these flows even more desperately if Russia’s product exports falter.

  • Beyond Russia and China, a wild card remains weather. More diesel is needed if it gets cold. Despite softening, diesel cracks remain high at $35 in Europe and $50 in the US. Less uncertain now, it seems the global economy could be turning a corner and stave off a prolonged or steep recession. Yet traders can’t figure out where this market is going and have gotten more bearish. Speculative capital is now betting 2:1 that crude prices will be rising. That was 7:1 six weeks ago. And balances are not much of a help either. On paper, the market should be drawing inventories as demand is higher than supply. But actual and assumed inventory data show growing stocks, for crude but now also for products.

  • Global oil demand growth for 2023 remains unchanged at 1.6 million b/d for a total 101.2 million b/d. Global supply is seen adding 1.5 million b/d for a total 101 million b/d, after adding some more production to Opec around the summer to prevent prices from spiking ahead of the second half supply shortage.
Oil Supply and Demand in 2023
(million b/d)Q1'23Q2'23Q3'23Q4'232023
OECD46.3 45.9 47.3 47.6 46.8 
Non-OECD53.5 53.8 54.7 55.6 54.4 
Total Demand99.8 99.7 102.0 103.2 101.2 
Opec Crude28.7 29.2 29.2 29.1 29.1 
Opec NGLs5.4 5.4 5.4 5.4 5.4 
Non-Opec64.2 63.7 63.9 64.3 64.0 
Processing Gain2.4 2.5 2.5 2.5 2.5 
Total Supply100.8 100.7 101.0 101.4 101.0 
Stock Change1.01.0-1.0-1.8-0.2

Oil Forecasts, Oil Demand, Oil Supply, Oil Inventories
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