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Oil market enters second half of 2023 balancing supply and demand uncertainties

A post by Neil Atkinson, Independent Energy Analyst

The end of the first half of 2023 is in sight and as always in the oil market we have seen great volatility so far this year with plenty of surprises. There is no reason to think that the second half will be any calmer.

To mid-May in 2022, the price of Brent crude oil averaged about $100 a barrel, including a spike to $128/bbl in mid-March. The main reason for high prices was the Russian invasion of Ukraine and fears that production and exports of oil from Russia would slump in response to self-sanctioning by trading companies and sanctions imposed by governments. Also of concern before the invasion was that the post-Covid economic rebound would be vigorous, and that oil demand growth would outstrip the supply response.

In fact, these fears have proved to be wrong. Partly because high prices caused demand growth estimates to be cut back and because Russia remains able to export oil subject to a G7-administered maximum price of $60/bbl. Indeed, some countries, notably India and China as shown in the chart, have substantially increased their purchases to take advantage of a price discount for Russian Urals crude versus Brent that at one time reached almost $40/bbl and remains today in the region of $20/bbl. Indeed, data from the International Energy Agency shows that so far in 2023 Russia’s exports of crude oil and products have averaged 8 million b/d which is higher than in 2022 which in turn was higher than in 2021. On the other hand, Russia’s revenues from exports have taken a hit from $18.7 billion per month in 2022 to an average of $13.6 billion in the first four months of 2023.

So far in 2023 the price of Brent crude oil has averaged about $80/bbl. As well as the resilience of Russian production and exports, a reason that prices fell back in late 2022 and into 2023 was that oil demand in China fell year-on-year for the first time since 1990, by 0.4 million barrels per day due to persistent and strict anti-Covid lockdowns. Now, free of restrictions China could see a rebound in 2023 of around 1 mb/d. A key factor behind this will be three years of pent-up travel demand, albeit mainly domestic, which could see jet fuel demand in China rise 40% year-on-year having collapsed in 2022.

For 2023 as a whole, on the assumption that China’s oil demand increases by about 1 mb/d, India and the Middle East each grow by about 0.2 mb/d, the OECD countries see growth of 0.4 mb/d, and with modest increases elsewhere, global oil demand will increase by 1.9 mb/d. Looking to see how the market will balance out this demand growth, based on current expectations leading producers Brazil, Canada, Guyana, Norway and the United States are expected to lead non-OPEC (excluding Russia) production growth of 1.7 mb/d. This implies for the year as a whole a market slightly in deficit.

There are, of course, huge uncertainties. On the demand side, the possibility of further interest rate increases in Europe and the United States raises the possibility of a recession and this could impact the strength of oil demand there and affect China which sells enormous volumes of goods to them. Indeed, China itself has problems with high levels of debt in the construction sector and lukewarm industrial demand for diesel, suggesting that the big recovery anticipated for this year could be more fragile than I think. The other uncertainty is on the supply side, and it is whether the OPEC+ countries will implement the more than 1 mb/d of production cuts they have announced.

For 2023 as a whole, on the assumption that the supply/demand balance as shown in the chart does turn out to be accurate, in response to the significant deficits in the second half of the year I expect Brent crude oil prices in that period to average close to $90/bbl. However, I believe that the risks for prices are all to the downside, and a combination of weaker demand growth and higher OPEC+ oil production than promised could see prices remain in the current range of between $75-$80/bbl.

Whatever the reality turns out to be, there will be many surprises on the way and the movement of oil prices is unlikely to be smooth.


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