One year on Nearly a year on from Russia’s invasion of Ukraine, global oil markets are trading in relative calm. Oil prices are back to pre-war levels with the exception of diesel, though even these have drifted much lower from last summer’s historical highs. World oil supply looks set to exceed demand through the first half of 2023, but the balance could quickly shift to deficit as demand recovers and some Russian output is shut in.

Gasoil/diesel markets after the European import ban on seaborne oil from Russia Embargoes on Russian crude and refined product imports and the EU restrictions on maritime services for transporting Russian oil to third countries (unless sold below G7 price caps) are impacting global oil flows and supply. Russian exports play a crucial role in balancing world product markets, particularly gasoil, and Europe has, up until now, always been central to its trade flows. An examination of the global gasoil balance shows the market could accommodate a 50% cut in Russian gasoil exports but not a complete rupture due to global refinery capacity limits.

The EU embargo and Maritime Services Ban on Russian oil products came into effect on 5 February 2023.Flows from Russia to the EU must find new destinations while Europe seeks alternatives. Europe imports 1.1 mb/d of gasoil, of which ~600 kb/d from Russia (60% of the country’s total gasoil exports), accounting for 20-25% of world gasoil trade (Asia-Oceania 25%, Americas 20% and Africa 18%). After 2020’s pandemic-driven stock bulge, reduced refinery activity due to closures and weak margins tightened the gasoil supply-demand balance in 2021 and 2022. In 2022, combined OECD industry and government stocks fell to their lowest since 2Q08, pushing prices to record premiums versus crude. World gasoil balance tensions have recently eased with slower gasoil demand growth, new refineries coming online and stronger gasoil cracks supporting non-Russian yields, particularly in China.
A strong recovery in refinery margins and weak economic growth starting 2Q22 have progressively returned the gasoil market to a relative balance. Available data show current gasoil stocks (OECD plus visible non-OECD stocks) are near those of end-2019 after a recent build. Gasoil’s price premiums to crude have narrowed sharply since October (notably after French refineries came back-on-line) but remain high versus historical values despite EU embargoes having yet to impact Russian gasoil exports. Global gasoil demand growth eases from 1.6 mb/d in 2021 to 0.7 mb/d in 2022 and to 0.1 mb/d in 2023, curtailed by weaker economic growth and high prices. OECD demand in 2023 falls slightly as high energy prices and interest rates slow industrial activity and lower gas prices reduce gas-to-oil switching. Non-OECD gasoil use rises (+0.2 mb/d), notably in China and India, while it stagnates or falls elsewhere.

Demand Overview World oil demand will climb by 2.0 mb/d this year to reach 101.9 mb/d. The Asia-Pacific region (+1.6 mb/d), fuelled by a resurgent China (+900 kb/d), dominates the growth outlook. A pronounced uptick in air traffic during January emphasises the central role of jet/kerosene deliveries in 2023 growth – these will soar by 1.1 mb/d worldwide to reach 7.2 mb/d, 90% of 2019 levels. Following Beijing’s late-2022 about-turn on its stringent anti-Covid restrictions, we expect Chinese oil demand to quickly pick up steam and comfortably exceed 2021 levels by the end of the year (see China reopening sets stage for oil demand recovery). High frequency indicators for activity over the Chinese New Year period show a surge in domestic flights and other long-distance travel, while purchasing managers’ indices (PMIs) point to improving economic conditions.

January saw a marked upturn in economic sentiment, as China’s reopening will give a welcome boost to the listless world economy. This prompted the IMF to raise its growth outlook for the first time in a year. The most immediate improvement concerns non-OECD countries, as developing Asian economies are buoyed by the rebound in regional tourism and trade. However, major OECD exporters such as Korea and Germany are also set to leverage the upswing in global growth. European prospects had already improved markedly in the wake of the striking collapse in the region’s natural gas prices, deflating anxiety about a winter energy crisis. A descent into recession was also avoided in 4Q22, as the eurozone steered clear of a GDP contraction. Improving business confidence and PMI readings are a testament to the bloc’s budding economic revival. By contrast, US data readings point to a loss of economic momentum, despite a labour market that remains extremely tight. Last year’s rate hikes, besides cooling inflation, have begun to slow economic growth and consumer demand, with most economic forecasters still seeing a US recession on the cards in 2023. The diminishing US prospects and a more dovish Federal Reserve are also weighing on the greenback, with the US Dollar Index 10 percent below its September peak.

China reopening sets stage for oil demand recovery Following the relaxation of anti-Covid lockdown measures in China, the country is set to resume its established role as the primary engine of world oil demand growth. An increase of 900 kb/d this year will account for 45% of global gains. The 6% annual increase comfortably outpaces a relatively lacklustre GDP outlook (our forecast assumes 4.5% growth in 2023). However, much of this simply reflects exceptional constraints on mobility in 2022, when usage fell by 2.7% despite a 3% hike in GDP. Since it is impossible to observe unconstrained oil demand for China in 2022, comparing 2023 with 2021 makes it much easier to understand the major drivers of growth. Consumption is expected to increase by a comparatively modest 480 kb/d from 2021 to 2023, which would comprise the weakest two-year gain since 2007-09 (+400 kb/d).

Total GDP gains across 2022 and 2023, imply an underlying increase of 560 kb/d in oil use over the
two years (based on an average GDP elasticity of about 0.5 and excluding petrochemicals and jet fuel). Substantial ongoing expansions in China’s olefins and aromatics capacity indicate a structural 2021-23
increase of 740 kb/d in naphtha and LPG/ethane use. Because air travel was already subdued relative to the rest of the Chinese economy in 2021, we expect large gains in jet/kerosene. After a sharp reduction in 2022 (-230 kb/d) the strong rebound (290 kb/d) which is already underway in 2023 will see jet/kerosene demand move 60 kb/d ahead of 2021 to reach 90% of 2019 levels. Other structural factors will limit the extent of any rise. Notably, efficiency improvements in the road vehicle fleet and new EV sales imply the loss of 170 kb/d and 200 kb/d of demand growth, respectively. China’s EV uptake has been far more rapid than in any other large country. In addition, the difference between forward Brent prices for 2023 ($84/bbl) used in our forecast and 2021 prices ($69/bbl) suggests an approximately 70 kb/d drag on demand, based on a price elasticity of about 0.02. Together, these factors imply a theoretical total 2021-23 increase of 920 kb/d or, following 2022’s exceptional 420 kb/d drop in use, a 2023 y-o-y rise of 1.3 mb/d. While growth will reach these levels by year-end, the gap (440 kb/d) between this and our forecast for annual oil demand reflects various other bearish factors apparent in countries that exited lockdowns during 2021. These are difficult to quantify precisely. Notwithstanding the sharp rise in some activity measures, it will take several months to fully reopen the country, and some re-imposition of restrictions may be required. Furthermore, there will be lasting damage to some sectors and wider behavioural changes that will take longer to normalise.

Recent OECD industry stock changes OECD Americas Commercial stocks in OECD Americas fell by 4.8 mb in December, versus a typical 19.1 mb decline. At 1 479 mb, they remained 49.9 mb below the five-year average but showed y-o-y growth for the first time in a year. Crude oil stocks posted counter-seasonal builds of 11.4 mb while NGL and feedstock inventories rose by 2.7 mb. Low US refinery runs due to winter storm Elliot at end-December and the US SPR release (15.1 mb) contributed to the increases. OECD America’s refinery intake was 210 kb/d lower than a year before. Due to sluggish US refinery activity, product stocks lost 19 mb, compared with a typical 3 mb build. Gasoline stocks increased (+5.5 mb) but less than the normal build, while middle distillate stocks drew counter-seasonally (-3.1 mb versus +12.2 mb). Fuel oil inventories edged up by 0.8 mb. Other product inventories declined by a hefty 22.2 mb, in line with the seasonal norm.

price caps of $60/bbl for crude on 3 December and on 3 February $100/bbl for “premium” products (normally priced higher than crude) and $45/bbl for “discounted” products (normally priced at a discount to crude). The price cap legal framework advises that they remain ~5% below average realized prices for Russian crude and oil products and that they be reviewed every 2 months. Argus publishes daily assessments of free-on-board (FOB) prices for several Russian crudes amounting to 80-85% of total Russian seaborne exports: Urals loaded at the ports of Primorsk and Ust Luga (42% of exports in January), Urals at Novorossysk (11%), ESPO at Kozmino (25%), CPC Blend (3%), and Siberian Light (1%). They also publish weekly assessments of discounts to European product prices for Russian product sold FOB Black Sea or Baltic. Argus’ European product price assessments exclude Russian origin material4 . The range of uncertainty for these discounts is quite wide (typically ~20%, but as low as 10% and as high as 30% of the discount). The IEA calculates a weighted average price of Russian seaborne crude oil exports based on Argus’ assessments of their values and Kpler’s export volumes by grade (pipeline crude flows, exempt from sanctions). Argus does not assess all grades, but coverage amounts to over 80% of export volumes. The Russian seaborne weighted average crude export price (FOB, excluding freight and insurance costs) was $53/bbl in January (-$29.7/bbl versus North Sea Dated at $82.9/bbl). This was $0.8/bbl lower than in December 2022. Baltic Urals averaged $43/bbl while Black Sea Urals was $44.5/bbl in January. Both averaged around $47/bbl in early February. ESPO (FOB Kozmino) was assessed at $71.70/bbl in January, easing to $70.40/bbl in the first week of February.

Premium products include gasoil and diesel in the Baltic and Black Sea as well as gasoline in the Baltic. Jet and VGO are not included. All premium products were below $100/bl in December and January. After a slight rise in January, prices dipped sharply below $80/bbl in February. Discounted products include naphtha as well as 3.5% sulphur fuel oil in the Baltic and the Black Sea. Since December, the monthly average discounted product price has been below $35/bl. Products were below $40/bl from end-November to early January, but naphtha rose to ~$50/bl starting 12 January.

Freight Global tanker activity stagnated in January, with freight rates retreating from recent November highs. Prices for charters fell across all routes starting mid-December, with sharp declines continuing into January. Prices for long-haul VLCC charters were down by $0.55/bbl to $1.75/bbl. Rates have fallen 48% from November’s highs of $3.34/bbl, driven by sluggish demand, particularly in the Middle East, as a large tonnage overhang softened rates. Suezmax rates from West Africa fell by $0.39/bbl to $3.17/bbl. Baltic Aframax rates plunged by $1.64/bbl m-o-m to $2.79/bbl after having peaked at $4.63/bbl the first week of December. North Sea Aframax rates fell by $0.75/bbl to $1.62/bbl.

Clean tanker rates slumped by 37% in January, to their lowest since April 2022. In anticipation of the 5 February EU sanctions, buying of Russian product surged and sustained clean tanker rates in recent months. However, as the deadline approached, a long tonnage list of product charters materialised. Long Range shipments (LR) from the Middle East fell by 29% in January m-o-m to an average of $5.82/bbl. Rates were in freefall throughout the month, dropping from $8.49/bbl in the first week of January to $3.07/bbl at the start of February. Medium-Range (MR) tanker rates showed similar declines across the regions as interest for product charters waned and tonnage lists grew.

Source:http://IEA