Oil Market Report - May 2023

• World oil demand is forecast to rise by 2.2 mb/d year-on-year in 2023 to an average 102 mb/d, 200 kb/d above last month’s Report. China’s demand recovery continues to surpass expectations, with the country setting an all-time record in March at 16 mb/d. While the OECD is set to return to growth in 2Q23, its average 2023 increase of 350 kb/d pales in comparison with 1.9 mb/d in non-OECD gains.
• Significant outages in Iraq, Nigeria and Brazil were only partly offset by increases elsewhere, with global oil supply down by 230 kb/d to 101.1 mb/d in April. Steeper losses are in store for May as wildfires shut in Canadian barrels and extra cuts from some OPEC+ producers take effect. From April through December, OPEC+ oil supply is set to fall by 850 kb/d, while non-OPEC+ rises by 710 kb/d. For 2023 as a whole, global oil supply expands by 1.2 mb/d, led by the United States and Brazil.
• Global crude throughputs reach an estimated 82.3 mb/d in 2023 as record 1Q23 runs in Asia led to a 300 kb/d upward adjustment versus last month’s Report. However, weak margins mean the 2H23 runs forecast has been downgraded, most notably for Europe and the US. New capacity and ample availability of discounted Russian crude in Asia skews activity away from the Atlantic Basin.
• Russian exports of crude and refined oil products edged up in April to a post-invasion high of 8.3 mb/d. Shipments of crude oil increased by 250 kb/d, offsetting a decline in product exports of 200 kb/d. Estimated oil export revenues increased by $1.7 billion to $15 billion on the back of higher crude oil exports and a narrower Urals discount.
• Global observed oil inventories declined by 7.9 mb in March as a surge in oil on water and a slight increase in non-OECD stocks failed to offset a hefty 56 mb decline in the OECD. Led by a sharp draw in products, OECD industry stocks fell to a six-month low of 2 753 mb to 89 mb below their five-year average. Preliminary April data show a build in on land inventories and a draw in oil on water.
• North Sea Dated crude soared by around $10/bbl to $88.09/bbl in mid April following the surprise output cuts announced by some OPEC+ members. Prices failed to hold on to the gains, however, as pessimism about global economic growth resurfaced, exacerbated by tightening bank credit and a reversal of technical support in paper markets. At the time of writing, Dated was trading around $76/bbl.
  

Oil prices retreated during April and early May as concerns over the health of the global economy and oil demand prospects depressed market sentiment. North Sea Dated plunged by nearly $16/bbl in just two weeks, reversing gains that followed the surprise announcement by some OPEC+ countries to cut output from May. Prices were pressured lower by muted industrial activity and higher interest rates, which, combined have led to recessionary scenarios gaining traction and worries of a downward shift in oil demand growth. The current market pessimism, however, stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 mb/d.

Our forecast for world oil demand growth for 2023 has been revised up to 2.2 mb/d in this Report, with China’s rebound even stronger than previously expected. The world’s second biggest oil user after the US will account for nearly 60% of global growth in 2023. Record demand in China, India and the Middle East at the start of the year more than offset lacklustre industrial activity and oil use in the OECD. The latter accounts for just 15% of growth this year, supported by consumer spending and personal mobility. Overall, world oil demand is set to average 102 mb/d in 2023, 1.3 mb/d more than 2019.

On the supply side, hefty losses from Iraq’s northern Kurdish region following the shutdown of the Iraq-Türkiye export pipeline since end-March, wildfire disruptions in Canada, worker protests in Nigeria and maintenance related cuts in Brazil have dominated recent news. Yet, so far, these outages have neither prompted a spike in prices nor triggered a visible decline in inventories.

At the same time, Russian oil supply continued to prove resilient. In April, Russian oil exports reached a post-invasion high of 8.3 mb/d. By our estimates, Moscow did not deliver its announced 500 kb/d supply cut in full. Indeed, Russia may be boosting volumes to make up for lost revenue. The country’s oil export revenues rose by $1.7 bn to $15 bn last month but were 27% lower than a year ago while tax receipts from its oil and gas sector were down by 64% y-o-y.

Russia seems to have few problems finding willing buyers for its crude and oil products, frequently at the expense of fellow OPEC+ members in the two-tier market that has emerged since the embargoes came into force. New refining capacity is driving a continued shift east in forecast crude runs for the remainder of the year, mirroring regional demand strength. Record runs from refiners with access to discounted feedstock along with sustained Russian product exports and lacklustre global diesel demand have undermined product cracks, margins and crude price premiums.

With world oil supply set to fall further this month as new OPEC+ cuts take effect, global oil inventories may again come under pressure. The release of record volumes from IEA government stocks over the past year has reduced the industry inventory deficit versus its five-year average to less than 90 mb from more than 300 mb a year ago. Preliminary data for April show a rise in on land product stocks. Those builds may help mitigate price volatility in the coming months if supply falls short of the seasonal rise in world oil demand.