Oil Market Report

Demand Overview Global oil demand growth started 2023 with a whimper but is projected to end the year with a bang. Gains will accelerate to 2.6 mb/d year-on-year (y-o-y) in 4Q23 from only 710 kb/d in 1Q23. Average 2023 deliveries will rise by 2 mb/d to reach 102 mb/d. Rebounding jet fuel use and a resurgent China will see an overall 1Q-4Q ramp-up of 3.2 mb/d, the largest relative in-year increase since 2010 with oil use surging to 103.2 mb/d in 2H23

The disparity between lacklustre OECD and robust non-OECD regions continued to widen. Global 4Q22 demand fell by 80 kb/d y-o-y, as an 860 kb/d OECD decline was counterbalanced by a non-OECD increment of 780 kb/d. This was the first quarter showing a y-o-y contraction since 2020. Europe (-610 kb/d y-o-y) was the main contributor to the OECD’s slump, while the Middle East (+650 kb/d y-o-y) and India (+270 kb/d y-o-y) underpinned non-OECD growth. Real-time indicators for Chinese mobility mostly stabilised after January’s remarkable bounce, led by air traffic with domestic flights now well above pre-pandemic levels. In this regard, we have further increased our estimate for Chinese 2023 jet/kerosene use, by 60 kb/d – a testament to the fuel’s present status as the key driver of global demand growth. Rebounding February PMIs, settling comfortably in expansionary territory, also echo the country’s economic resurgence. The global economic outlook benefitted from China’s newfound momentum, particularly that for the eurozone, where sentiment continued to improve markedly, now that a winter energy crisis has been averted. US indicators were also mostly positive with persistent tightness in the labour market adding to the more confident mood.

During 2022, jet/kerosene demand averaged only 77% of pre-pandemic levels. This was far behind the next lowest major product (gasoline, 98% of 2019), reflecting the outsized impact of Covid-19 on air travel and its sluggish revival. However, during 2022 jet/kerosene steadily gained ground and we expect that this year’s usage should reach 92% of the 2019 mark.

Global flight counts, per FlightRadar24, have risen from 99 800/day in December (89% of 2019) to 107 600/day in February (1.4% above 2019). Much of this abrupt return to pre-pandemic rates reflects spiking Chinese travel (predominantly domestic, but with international flights also beginning to rise in February), and more moderate increases for routes involving other regions. Internal Chinese flight numbers have gone from about 4 000/day in early December to average more than 13 000/day in February (compared with about 10 000/day in February 2019), according to Radarbox

OECD oil demand began 2023 in subdued fashion, with a narrow y-o-y increase of 190 kb/d estimated in 1Q23. Nevertheless, indications of fragility were apparent in official January data for Korea (-290 kb/d) and Germany (-240 kb/d). This comes on the heels of strikingly soft demand during 4Q22. Deliveries contracted in all three OECD regions, for an overall drop of 860 kb/d y-o-y, in the face of faltering macroeconomic drivers and disruptive weather conditions. December demand was especially dismal (-1.4 mb/d), with the US (-1.2 mb/d) leading losses. Overall 2023 consumption is expected to reach 46.4 mb/d, rising by 410 kb/d from 2022’s 46 mb/d.

OECD America bore the brunt of the tumbling deliveries in December (-840 kb/d), with the US ending the year in the grip of a deep freeze and petrochemical producers curtailing operations amid oversupplied global polymer markets. Average 2022 demand hit 25 mb/d (+700 kb/d) and is expected to rise by a further 160 kb/d to 25.2 mb/d this year. Overall US deliveries dropped by 360 kb/d in 4Q22 and we forecast that 1Q23 usage will edge lower y-o-y (-20 kb/d). The major drivers of this slowdown are gasoline, gasoil and LPG/ethane. US gasoline demand declined y-o-y by 310 kb/d in December (-3.4%) and was 280 kb/d below the November level. Federal Highway Administration (FHWA) figures show that during December vehicles miles travelled fell y-o-y (-1.8%) for the third month running, but were roughly flat m-o-m. Weather-related logistical problems for distributors likely hampered deliveries. Preliminary numbers, based on US Energy Information Administration (EIA) weekly data indicate a further decline in January before a partial rebound in February. FHWA data show that US road traffic (excluding freight) remained ~2% below 2019 levels in 2022 despite a continuing strong economic recovery and robust employment figures, with increased remote working and high gasoline prices for much of the year likely major limiting factors.

Supply Overview Global oil supply leapt 830 kb/d in February as the US and Canada rebounded strongly from winter storms and other outages. A combined increase of 700 kb/d from North America helped push global production to 101.5 mb/d in February and, based on our current forecast, it should hover around that level through June. While that’s more than enough to match demand in the first half of the year, it would come nowhere close in the second half of 2023 when seasonal trends and China’s recovering fuel use are expected to boost demand to record levels above 103 mb/d.

OPEC+ crude oil supply OPEC+ crude oil production from all 23 countries rose 180 kb/d to 44.53 mb/d in February, with Russia, Saudi Arabia and Nigeria driving the increase. Output in Kazakhstan, Angola and Iraq declined due to maintenance and unplanned outages. Supply from OPEC countries edged up 70 kb/d to 29.17 mb/d, while volumes from non-OPEC nations rose by 110 kb/d to 15.36 mb/d. The coalition’s effective spare capacity, excluding volumes of crude oil shut in by sanctions in Iran and Russia, stood at 3.7 mb/d in February, with Saudi Arabia and the UAE holding the lion’s share.

Refining Overview Global crude runs are forecast to average 82.1 mb/d in 2023, an increase of 1.8 mb/d y-o-y and unchanged from last month’s Report. Stronger-than-expected refinery throughputs in January and the healthy margin environment lift our 1Q23 forecast by 0.4 mb/d. Furthermore, a higher assessment for Russian refinery intake in 2H23 is also incorporated into this Report, following the initial signs that Russian oil export prices remain on average below the G7 price cap and buying interest for Russia products remains healthy. However, these changes are offset by upward revisions to maintenance forecasts for the balance of the year and a delay to the forecast start-up of the Dangote refinery in Nigeria.

Regional refining developments Global crude and product markets are adapting to the G7 price cap and EU import ban at a rapid rate. These changes have created a multitude of challenges and opportunities for refineries globally in equal measure. Heavily discounted Russian crude and products are flowing to new markets and creating potentially huge profit opportunities for those refiners capable of capturing them. Recent data provide evidence of these challenges and opportunities. Record Indian crude throughputs in January are emblematic of what heavily discounted crude can do to incentivise additional product supply. Concurrently, European refineries have ensured new sources of crude to compensate for the loss of Russian crude supplies while a rise in local product prices has made the higher cost of these imports affordable. Furthermore, while there is ample evidence of markets adjusting to new inter-regional crude and product flows, factors such as overall demand growth and the prospect for sustained economic growth in 2023, remain constraints on how much additional crude and products can be accommodated in the longer run.

Stocks Overview Global observed inventories surged by 52.9 mb in January, with stock builds in both the OECD (+57.1 mb) and non-OECD (+13 mb) and a decline in oil on water (-17.2 mb). Total stocks reached nearly 7.8 billion barrels, their highest level since September 2021. OECD inventories built due to a decline in demand, and as Europe started replenishing tanks ahead of a complete embargo on Russian oils.

Recent OECD industry stock changes OECD Americas Industry stocks in the OECD Americas increased by 26.4 mb in January. At 1 534 mb, they were higher than the five-year average for the first time since March 2021. US refineries were still affected by the Arctic Blast at the end of December, and refining intake was 440 kb/d lower than a year before, resulting in a massive 28.4 mb crude stock build. NGL and feedstock inventories edged down by 0.5 mb. Despite the weak refinery throughput, petroleum product stocks fell by a mere 1.4 mb versus the normal 6.5 mb seasonal draw in January. Other product inventories led the decline, falling 21.1 mb. Gasoline, middle distillates and fuel oil built by 14.3 mb, 2.9 mb and 2.5 mb, respectively, largely in line with their five-year averages.

Futures markets Front-month WTI and Brent futures fell by $1.30/bbl and $0.40/bbl m-o-m, respectively, as China-driven growth optimism gave way to jitters over hawkish central bank policies. Surging interest rates took their toll on all sectors, particularly denting commodities’ overall appeal as an asset class, with LME base metals falling by 10 per cent on average in February. Within the crude complex, WTI bore the brunt of the downturn as US oil inventories built throughout February. According to EIA data, US crude stocks recorded their 10th straight weekly increase by the end of February – well ahead of their typical seasonal advance. A recovery in transatlantic freight rates also contributed to WTI’s relative softness against Brent. Amid range-bound trading, oil’s technical price picture remained muted – Brent hovered around its 50-day moving average throughout the month but was unable to conquer its 100-day resistance, let alone the 200-day level.

In keeping with recent months, forward curves were steady. Backwardation over the 12-month strip was about $4/bbl for WTI and $5/bbl for Brent, while Dubai time spreads of $7/bbl reflected tighter balances East of Suez. Contango remained restricted to WTI’s front-end, underpinned by US crude inventories well above the 5-year average. Front-month cracks for ULSD versus WTI fell by $15/bbl m-o-m to $42/bbl. On the whole, buyers were well covered for their immediate needs, having stocked up ahead of the 5 February EU product embargo, while clement weather in the Northern Hemisphere weighed on heating demand. At the same time, China’s refiners, incentivised by elevated distillate margins, cranked up operating rates after the New Year holiday. In a testament to comfortable supplies, US distillate inventories rose by 5 mb to 122 mb during February, according to weekly EIA data, defying their customary seasonal draw.

Freight Global tanker rates in February saw large gains for VLCCs and for tankers out of West Africa. Dirty tanker rates for long-range vessels rose in February with VLCC charters up $0.35/bbl to $1.87/bbl. Rates climbed to $2.23/bbl in early March but remained well below November’s peak of $3.34/bbl. On average, Suezmax rates for charters out of West Africa gained just $0.06/bbl m-o-m despite rising by $1/bbl from an early February trough to almost $3.9/bbl in early March as available tankers were quick to clear. Aframax rates were little changed, dropping around $0.11/bbl m-o-m for both Baltic and North Sea shipments.