Energy Prospectus

The IEA Oil Market Report (OMR) is one of the world's most authoritative and timely sources of data, forecasts and analysis on the global oil market – including detailed statistics and commentary on oil supply, demand, inventories, prices and refining activity, as well as oil trade for IEA and selected non-IEA countries.

Summary: with my comments in blue

Global oil demand is projected to climb by 2.2 mb/d in 2023 to reach 102.1 mb/d, a new record. However, persistent macroeconomic headwinds, apparent in a deepening manufacturing slump, have led us to revise our 2023 growth estimate lower for the first time this year, by 220 kb/d. Buoyed by surging petrochemical use, China will account for 70% of global gains, while OECD consumption remains anaemic. Growth will slow to 1.1 mb/d in 2024. < To reach the 2.2 million bpd YOY increase, global oil demand will need to average close to 103.5 million bpd (103 mbpd in Q3 and 104 million bpd in Q4. If demand increases another 1.1 million bpd in 2024 this world will need every barrel of oil that OPEC can produce and over 13 million bpd from the U.S.

World oil supply rose 480 kb/d to 101.8 mb/d in June but is set to fall sharply this month as Saudi Arabia makes a sharp 1 mb/d voluntary output cut. For 2023, global production is forecast to increase by 1.6 mb/d to 101.5 mb/d, as non-OPEC+ expands by 1.9 mb/d. In 2024, global supply is set to rise by 1.2 mb/d to a new record of 102.8 mb/d, with non-OPEC+ accounting for all of the increase. < Note that this is lower than IEA's oil demand forecast. This is why Rystad, UBS and Raymond James all think OECD Petroleum inventories will be declining to ~25 Days of Consumption. OECD inventories have NEVER BEEN THAT LOW.

Refinery crude throughput estimates for 2023 and 2024 have been raised by 130 kb/d and 90 kb/d, respectively, to 82.5 mb/d and 83.5 mb/d. Higher Russian crude runs and the start-up of new refining capacity underpin the revision. Refining margins remain robust, with very strong Atlantic Basin gasoline cracks and rapid gains in diesel, jet fuel and fuel oil more than offsetting weak naphtha cracks. < Refined product prices will continue to increase because "rationing by price" will be the only way to balance supply and demand.

Russian oil exports fell 600 kb/d to 7.3 mb/d in June, their lowest since March 2021. Estimated export revenues plunged by $1.5 bn to $11.8 bn – nearly half the levels of a year ago. Moscow has promised a further 500 kb/d cut to exports from August to stem declining prices and revenues, but may hold production steady as domestic oil demand rises seasonally. < Russian exports are FINALLY FALLING. If this continues we will see $100/bbl WTI soon.

A substantial 44.2 mb build in non-OECD countries, led by a surge in China, pushed global observed oil inventories up by 19.4 mb in May to the highest since September 2021. By contrast, OECD oil stocks drew by a marginal 1.8 mb. Oil on water declined by 23 mb as additional OPEC+ output cuts saw seaborne oil exports falling to their lowest since January. Preliminary data show a 9.2 mb draw in June. < The U.S. is still importing 400,000 to 500,000 bpd of oil from Saudi Arabia. It will take six to eight weeks before the reduction in Saudi exports impact U.S. oil supply.

Amid range-bound trading, ICE Brent futures fell by $1/bbl m-o-m in June to $75/bbl, as hawkish central bank policies continued to weigh on investor sentiment. Additional voluntary cuts by some OPEC members and a weaker US dollar failed to dispel the macro gloom. Asian crude benchmark Dubai outperformed WTI and Brent, as a tight East of Suez sour crude market contrasted sharply with a comfortably supplied Atlantic Basin. At the time of writing, Brent was trading around $78/bbl.

Highlights
Benchmark crude oil prices traded in a narrow range in June as persistent economic woes overshadowed deepening supply cuts from some OPEC+ countries. Amid an overall slackening in oil demand growth, China’s widely anticipated reopening has so far failed to extend beyond travel and services, with its economic recovery losing steam after the bounce earlier in the year. North Sea Dated hovered around $75/bbl for the month, marginally below May levels and a staggering $49/bbl less than a year ago. At the time of writing, the North Sea benchmark had inched up to $80/bbl.

Lower production from Saudi Arabia and core OPEC+ members since production cuts were first implemented last November has so far been offset by higher output from other producers. In June, global oil supply was a mere 70 kb/d below October levels just before the first round of OPEC+ cuts kicked in. Iran, exempt from cuts due to sanctions, ramped up production by 530 kb/d over the same period, reaching a five-year high. At the same time, output recovered in Kazakhstan and Nigeria. Outside of the alliance, supply from the United States rose by 610 kb/d as natural gas liquids output surged to all-time highs while biofuels increased seasonally. But global supply could tumble by more than 1 mb/d this month as Riyadh implements steeper cuts. The Kingdom’s crude output is set to plunge to a two-year low of around 9 mb/d in July and August, leaving it trailing behind Russia as the bloc’s top crude producer. < Raymond James believes that Iran's oil exports have peaked since Team Biden is not enforcing the sanctions. Team Biden will do whatever they can to keep oil prices low, but they are about out of options.

World oil demand is coming under pressure from the challenging economic environment, not least because of the dramatic tightening of monetary policy in many advanced and developing countries over the past twelve months. Oil demand growth in 2023 has been revised down for the first time this year, to 2.2 mb/d from 2.4 mb/d expected previously, with China poised to account for 70% of the total. While Chinese demand growth continues to surprise to the upside, a surge in domestic petrochemical activity has undermined steam cracker margins and activity elsewhere. Demand in the OECD, and Europe in particular, is languishing amid a grinding slowdown in industrial activity. African countries have seen imports and demand decline by higher retail fuel prices after subsidies were dismantled. Even so, global oil demand is set to rise seasonally by 1.6 mb/d from 2Q23 to 3Q23, and to average 102.1 mb/d for the year as whole. Growth will slow to 1.1 mb/d in 2024, as the recovery loses momentum and as ever-greater vehicle fleet electrification and efficiency measures take hold. < Note that more EVs will not lower oil demand, per IEA (that always under-estimates oil demand), they will just slow oil demand growth a tiny bit. A massive increase in mining needed to produce the materials to make EVs will actually increase diesel demand.

Global observed oil inventories look relatively comfortable, having recovered to their highest level since September 2021. OECD industry stocks rose by 170 kb/d in May. At the same time, China posted its largest monthly increase in crude stocks in a year, at a steep 1.1 mb/d, fuelled by a sharp rise in crude oil imports and despite near-record refinery throughput rates. China’s recent buying spree included heavily discounted Russian and Iranian barrels. Global oil balances imply a marginal stock build in 2Q23. But with the surplus mostly in Chinese crude and US LPG tanks, ongoing draws in oil on water and deeper supply cuts starting this month suggest the oil market may soon see renewed volatility. < Per Raymond James, OECD Petroleum Inventories will decline by 2.6 million bpd in Q3 and another 2.9 million bpd in Q4.

Why did U.S. crude oil inventories increase last week by over 5 million barrels?

Primary Reason: U.S. Department of Energy data published today show U.S. crude exports slumped sharply in the week ending July 7 (2.144 million b/d from 3.901 million b/d the week before and 5.338 million b/d two weeks ago).
Simple Math: (3.901 - 2.144) X 7 days = 12.299 million barrels

Also, 401,000 barrels were moved from the SPR to commercial inventories.

EIA reported a 100,000 barrels per day decline in U.S. oil production during the week ending July 7.

Comments from Bloomberg Research late on July 12.
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July 12, 2023

1. Diesel prices collapsed in 1H2023 on soft activity in Asian manufacturing and construction, a global slump in intermodal traffic, and a steep contraction in Northern Hemisphere demand for heating fuels amidst an exceptionally warm winter. These factors drove a large, worldwide build in gasoil inventories. At one point in late April, gasoil stocks in the Amsterdam-Rotterdam-Antwerp (ARA) hub were 60% higher than last year and still rising. Swollen supplies forced cash diesel prices lower to clear the physical markets. The downward pressure on retail and wholesale diesel prices in turn forced intense downward pressure on crude oil prices in both the cash and futures markets to restore profitability, and thus sustain throughput, in Asian refinery operations. For the past three months, we have maintained that a key inflection signal will be when the Singapore ultra-low sulfur diesel crack relative to frontline Dubai widens on strength in the product price rather than weakness in the crude price (Diesel hits the brakes, 19-Apr-2023).

2. This is now happening. Today, in the Asian cash markets, ultra-low sulfur diesel FOB Singapore surpassed $100 per barrel for the first time since early April (Slide 1 below). This diesel price is now just $3 per barrel below its level on April 12. That was the date when both the product and crude prices in that crack began a precipitous fall (Slides 2 and 3 below). As recently as nine days ago, the prices of both the product leg and the crude leg in this crack were about $11.70 per barrel below their respective April 12 levels, leaving this crack flat with its April 12 starting point. In a marked change, the product-led advance over the past week has lifted this crack to $4 over the April 12 reference level. The outright spread is now nearly $20 per barrel, finally opening room for crude, the price taker, to follow.

3. As this demand-side development emerges in Asia, activity in European physical markets is confirmatory. The cash price for gasoil in the ARA hub has also advanced this week in a move that looks more sustainable to us than the spurt we correctly assessed to be a false dawn a month ago (Slide 4 below). This European gasoil cash price is now within $30 per mt of its April 12 level ($764 per mt). This distance is sufficiently small that it emboldened futures traders today to propel the prompt ICE gasoil price to within a hair of that April 12 price threshold.

4. Draws on ARA gasoil inventories support the price advances. At 14.66 million barrels as of July 7, those stocks are now 31% above the same week one year ago but are falling rapidly. As recently as June 9 the overhang relative to a year ago was still greater than 60% (Slide 5 below).

5. Exceptionally hot weather is once again a driving factor for diesel specifically and petroleum more generally. But now hot weather is working to raise price. Over the past few weeks, record-setting heatwaves have emerged in the United States and Europe. High temperatures have spurred natural gas demand and diesel demand on the margin for space cooling and electricity generation (Slide 6 below). In Germany, the extremity of weather has driven the temperature of the Rhine River to record highs, while also depressing its water depths toward record lows (Slide 7 below). Today the Rhine’s temperature at Koblenz hit 26.1 degrees Celsius. Normal for this time of year is 22.8 degrees Celsius. The prior 10-year high was 25.2 degrees Celsius (2017). Also today, the Rhine’s level at Kaub fell below 1.0 meter. Normal for this time of year is 2.26 meters. It is the second time a reading below 1.0 meter has been recorded at Kaub this year (last was March 6/7). The sudden shallowness of this crucial river has slowed barge traffic on it, delaying the pace of shipments of gasoil and other petroleum products to commercial customers.

6. In Europe, there is also an emergent factor on the supply side: Libya. Over the past week, rival factions within the Libyan political scene have once again begun arguing over revenue sharing as output approaches fresh ten-year highs. Officials at the ports are threatening to embargo oil exports. This threat puts into play more than one million barrels per day of field production and, more importantly, at least 800 thousand b/d of already-contracted crude supplies to Italian refiners and other Mediterranean customers. Prior internecine squabbles since 2011 have taken between six and thirty-six months to resolve and to restore normal operations (Slide 8 below).

7. Whether or not a Libyan disruption occurs, this tension appears to be successfully claiming an incremental call on U.S. crude exports and, for the time being at least, shifting the marginal price for marker crudes from the U.S. Midcontinent to the Med. While U.S. Department of Energy data published today show U.S. crude exports slumped sharply in the week ending July 7 (2.144 million b/d from 3.901 million b/d the week before and 5.338 million b/d two weeks ago), those flows were contracted weeks ago (Slide 9 below). Current cash market prices imply that midstream schedulers are today seeing new orders in reasonably good size. It also does not escape our attention that U.S. oil product exports last week, at 7.033 million b/d, nearly matched the 7.052 million b/d pace of the all-time high set in the week ending October 7, 2022.

8. We note too that the posted price for Wyoming Sweet, now above $68 per barrel, is now no longer arbitraging against the U.S. marginal cost for capex (Slide 10 below). We similarly note the reemergence this week of small but sustained backwardated structures in the nearby contracts of the NYM WTI and ICE Brent forward curves. It also looks like retail diesel prices in California may have made an important trough two weeks ago. This has our attention because Southern California has been a locus of (1) rising joblessness, and (2) the slump in container traffic through Los Angeles and Long Beach and subsequent trucking into the U.S. interior. An incremental upward impulse in the most expensive retail diesel price in the United States is probably accurately signaling incremental demand.

9. Other demand-side factors at a more macro level are also driving this shift in diesel risk. In China, the long litany of disappointing economic statistics has prompted Beijing to pledge a rising number of stimulus measures. While the steps are gradualist so far, they appear to be nourishing badly wounded sentiment. In the United States, today’s CPI report fuels rising expectations that the Federal Reserve may stop hiking rates after this month’s meeting.

10. We have been bearish oil throughout 1H2023. Reviewing commodity total returns, as measured by the S&P Goldman Sachs Commodity Index, crude oil, diesels, and natural gas all delivered losses in 1H2023. Those benchmark 1H2023 total returns were -10.5% for NYM WTI crude oil, -8.5% for ICE Brent crude oil, -17.3% for NYM ULSD, -14.0% for ICE gasoil, and -46.8% for NYM natural gas. We flipped to a bullish stance toward natural gas futures three weeks ago (Buy natural gas, 16-Jun-2023). With this note, we flip to a bullish stance toward diesel futures. We maintain our bearish call on WTI flat price, as the U.S. light tight oil production levels still look too hot and U.S. crude export demand is vulnerable, especially if the Libyan threat does not materialize. But we acknowledge the shift in the capex signal from the U.S. Midcon cash markets. We also agree that Dubai now has scope to follow cash diesel prices higher and would not be opposed to owning both prompt diesel and 2nd month Dubai from here.