September 29, 2022

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Benchmarking: 2023 Markets Will Balance Despite Less Russian Barrels

  • Demand for oil will grow by an average 2.2 million b/d in 2023, according to the latest consensus.
  • Based on the latest forecasts, Russian production of liquids hydrocarbons next year will decline by 1.2 million b/d.
  • Despite the steep drop in Russian supplies, global markets will roughly remain in balance next year.

Recession fears notwithstanding, demand for oil and other hydrocarbon liquids in 2023 will grow at the same pace as 2022, according to the four agencies surveyed for this report. This is an optimistic outlook given the gamut of bearish factors at play in global markets, such as a strong dollar and record-high commodity prices.

Russia is clearly the unknown quantity on the supply side now that the country is poised to encounter crude and product embargoes from Europe and a possible G7-led price cap on its fuels. Consensus shows Russian output falling by about 12% next year, while Moscow’s own forecast sees a 5% decline.

Even with some 1.2 million barrels per day of Russian liquids vanishing, global markets will maintain a rough balance thanks to a healthy jump in non-Opec-plus supplies and moderate gains in several Opec-plus members’ average annual output.

Bullish for 2023

Among consensus the range for growth in consumption next year is now 2 million-2.7 million b/d. The range for this year is strikingly similar: 2 million-3.1 million b/d.

For both years, Opec not only occupies the high end but is considerably ahead of other agencies. In the fourth quarter of 2023, for instance, Opec sees demand reaching 105 million b/d, which is considerably ahead of the 103.3 million b/d forecast by the International Energy Agency (IEA) or Energy Intelligence’s 103.4 million b/d. The US Energy Information Administration (EIA) is considerably lower and is forecasting fourth-quarter 2023 demand at 101.6 million b/d.

Without Opec, consensus demand growth for 2023 is about 2.05 million b/d, which coincides with Energy Intelligence’s forecast.

The factors weighing on demand next year are clear — economic contraction, zero-tolerance for Covid-19 breakouts in China, and fuel-switching during the winter — and already these are forcing adjustments. Energy Intelligence in the past two months, for instance, has boosted next year’s demand growth by 800,000 b/d due to fuel switching, higher jet fuel demand and expectations of lower inflation.

Finally, as regards 2023 consumption, consensus is in agreement on one aspect: 2023 will be the year that demand surpasses 2019’s level and global oil markets will have moved on from the pandemic.

Created with Highcharts 9.0.0(million b/d)DEMAND GROWTH FORECASTS, 2023Energy IntelligenceIEAOpecEIANov'23Oct'23Sep'23Aug'23Jul'23Jun'23May'23Apr'23Mar'23Feb'23Jan'23Dec'22Nov'22Oct'22Sep'22Aug'22Jul'2211.522.53Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO
Created with Highcharts 9.0.0(million b/d)DEMAND FORECASTS, 2023Energy IntelligenceIEAOpecEIASep'22Aug'22Jul'229698100102104Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO

Russian Supply

What happens next year to Russian barrels is arguably the most contested topic on the supply side. Consensus agrees it will decline — as does Russia’s own government — but assessing the extent of the fall is tricky.

Energy Intelligence is forecasting a decline of 1.3 million b/d in Russia's 2023 liquids output to 9.7 million b/d as a result of the upcoming EU embargo on crude and products and the probable price cap, which has led Moscow to threaten retaliatory measures such as cutting off supplies.

The IEA is forecasting a similar 1.3 million b/d decline to 9.6 million b/d, while the EIA sees a massive 1.6 million b/d fall in Russian liquids output to 9.3 million b/d.

Opec is the optimistic outsider and believes that Russian liquids production will slip by a mere 400,000 b/d to 10.5 million b/d, although it admits the forecast is subject to a high degree of uncertainty.

Balanced Market

With the supply of Russian barrels set to drop by over 1 million b/d, and demand forecast to grow by 2 million b/d, what will happen to next year’s balances?

Primarily, non-Opec-plus will fill the looming gap. The IEA is forecasting a 1.8 million b/d growth in non-Opec-plus liquids to 49.8 million b/d, while Energy Intelligence sees a 2.2 million b/d surge in this group’s output — also to 49.8 million b/d.

The EIA is forecasting a 1.7 million b/d growth in OECD liquids output to 34 million b/d, while that portion of non-OECD production not related to Opec will post growth of 500,000 b/d.

Opec itself should post higher average output in 2023 since the current production cut agreement, which ended this month, will be fully unwound. Thus Saudi Arabia’s output could average 11.1 million b/d next year as opposed to 10.7 million b/d in 2022.

All the same, inventories will have to be tapped. Both Energy Intelligence's and the EIA’s balances show a draw of 200,000 b/d. The IEA, meanwhile, sees next year’s market as roughly balanced of the parameters of the current Opec-plus agreement are extended through the next year.

Opec does not compile a balance like the other three agencies, nor does it forecast own output. However, the call on Opec is estimated to grow by 900,000 b/d in 2023, according to the organization’s most recent report. Given that nearly all spare capacity readily available within the group rests with two countries — the kingdom and United Arab Emirates — this suggests that Opec currently sees a tight market next year.

Created with Highcharts 9.0.0(million b/d)NON-OPEC SUPPLY FORECASTS, 2023Energy IntelligenceIEAOpecEIANov'23Oct'23Sep'23Aug'23Jul'23Jun'23May'23Apr'23Mar'23Feb'23Jan'23Dec'22Nov'22Oct'22Sep'22Aug'22Jul'22646566676869Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO

Gary Peach, New York