October 24, 2022


Benchmarking: Macro Malaise Crushes Demand Outlook

  • The bleak outlook for the global economy was foremost on forecasters’ minds this month, leading to downward demand revisions for 2022-23.
  • Global balances in 2022-23 have shifted significantly due to a darkening demand outlook and Opec-plus’ decision to slash crude output by 2 million b/d.
  • Consensus is increasingly pessimistic on Russian output and now sees 2023 supplies declining by some 1.3 million b/d.
The past month saw considerable upheaval on global oil markets. First, forecasts for the global economy worsened, wrecking the outlook for oil consumption. Second, Opec-plus stunned markets with an announcement to cut production by 2 million barrels per day starting in November, even though this more or less amount to 1 million b/d in real barrels based on September production.

Finally, the White House said it would sell 15 million barrels of crude from strategic reserves and, more importantly, was prepared to replenish stocks at about $70 per barrel of West Texas Intermediate. To be sure, this announcement emerged after October forecasts analyzed here were released.

Taken together, the events point to a small inventory build this year for global markets, while a sizable supply deficit could emerge in 2023. This is the key new development over the past month.

Demand Under Duress

Monetary tightening by central banks worldwide, high commodity prices, and China’s zero-tolerance policy on Covid-19 — to name a few — have conspired to damage the outlook for liquids consumption in the remaining months of 2022 and 2023.

“Uncertainty” is the catchword throughout consensus views. The International Energy Agency (IEA) wrote in its monthly report that the “relentless deterioration of the economy” is affecting demand, but the Paris-based agency also faulted higher prices triggered by Opec-plus’ production cut in early October.

On average, consensus lowered fourth-quarter demand by 560,000 b/d. Energy Intelligence was at the high end of adjustments: we reduced October-December demand down by 1 million b/d to 101.5 million b/d, resulting in a downward revision of 400,000 b/d for the entire 2022.

As far as 2023, we now have demand rising by 1.6 million b/d, or 500,000 b/d less than what we had forecasted in September.

Even Opec, typically the most sanguine forecaster among those reviewed here, has been swept up by the dreary environment. The Vienna-based organization reduced its fourth-quarter demand outlook by nearly 800,000 b/d to 102.4 million b/d and next year’s forecast by 700,000 b/d to 102.7 million b/d. Demand growth next year will amount to 2.3 million b/d, Opec says, which remains about 700,000 b/d above consensus.

In its latest report, the IEA revised fourth-quarter demand lower by 300,000 b/d to 100.6 million b/d and next year’s by 550,000 b/d to 101.3 million b/d.

Meanwhile, the US Energy Information Administration (EIA) was relatively “bullish” on the fourth-quarter outlook, only reducing demand by 130,000 b/d to 100.9 million b/d. 2023 demand will amount to 101 million b/d, which is almost 500,000 b/d lower than what the agency estimated last month.

Created with Highcharts 9.0.0(million b/d)DEMAND FORECASTS, 2023Energy IntelligenceIEAOpecEIAOct'22Sep'22Aug'22Jul'229698100102104Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO
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
Balances Reworked

Less oil flowing to a market that will consume less has altered balances. Yet even though fourth-quarter demand is now sluggish, and Opec-plus oil will be reduced, consensus is still forecasting a net draw of about 500,000 b/d in October-December.

Energy Intelligence is at the top range. Our balance points to an inventory draw of 1.1 million b/d in the fourth quarter, the result of a healthy surge in demand during the three months. Balances by the IEA and Opec show an inventory decline of 500,000 b/d. To be sure, Opec does not forecast its own crude oil output and the balance is based on Energy Intelligence’s estimate for Opec oil production during the final three months of 2022.

Lastly, the EIA is forecasting a generally balanced market for the fourth quarter.

As regards 2023, the outlook is clear: global markets will need to tap inventories. Energy Intelligence’s and the IEA’s balances currently indicate a deficit of 700,000 b/d, while the EIA’s shows a deficit of 300,000 b/d.

Opec’s balance, when using Energy Intelligence’s estimate for the group’s oil production points to a net deficit of 740,000 b/d next year. This is the highest among consensus and largely the result of Opec’s typically high demand number.

Created with Highcharts 9.0.0(million b/d)LATEST GLOBAL SURPLUS/DEFICIT ESTIMATESEnergy IntelligenceIEA*Opec†EIAQ1'22Q2'22Q3'22Q4'22-2-1012

*Reflects latest Opec-plus deal and member countries' sustainable capacity †Assumes Current EIG Opec Supply Forecast.
Source: Energy Intelligence, IEA OMR, Opec MOMR, EIA STEO

Russian Production Decline

Without a doubt, one of the trickiest components in global balances is understanding what might happen to Russian output. No one knows, but between an EU ban on the bulk of crude oil imports, to be enacted on Dec. 5, and a complete ban on products slated for Feb. 5, and then a potential price cap on deliveries to other countries, the unambiguous consensus is for a production decline.

Opec, which for months maintained a relatively bullish view of Russian production, adjusted its forecast down. The organization now sees an 800,000 b/d fall in liquids output next year to 10.1 million b/d. Previously the forecast was for a 400,000 b/d decline.

The IEA estimates that Russian liquids output will drop by 1.5 million b/d next year to 9.5 million b/d, and Energy Intelligence forecasts a fall of nearly 1.4 million b/d to 9.7 million b/d.

The EIA is the most pessimistic in this regard. The agency believes that the world’s third-largest producer will suffer an average decline of 1.6 million b/d in 2023 to 9.3 million b/d.

Created with Highcharts 9.0.0(million b/d)NON-OPEC SUPPLY 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

Gary Peach, New York