Oil Market Report - December 2022

• World oil demand is set to contract by 110 kb/d y-o-y in 4Q22, reaching 100.8 mb/d, up by 130 kb/d compared with last month’s Report. Strong gasoil use in key consuming countries outweighs weak European and Asian petrochemical deliveries. Oil demand growth has been increased to 2.3 mb/d (+140 kb/d) for 2022 as a whole and to 1.7 mb/d next year (+100 kb/d), when it will reach 101.6 mb/d.
• World oil supply fell 190 kb/d in November to 101.7 mb/d, breaking a five-month uptrend, after Saudi Arabia and other Gulf countries curbed supply in line with lower OPEC+ output targets. A steeper drop is expected next month as the EU ban on Russian crude imports and the G7 price cap take effect. Following annual gains this year of 4.7 mb/d, growth of 770 kb/d in 2023 will raise supply to 100.8 mb/d.
• Global refinery throughputs surged 2.2 mb/d in November to the highest since January 2020, resulting in sharply lower diesel and gasoline cracks and refinery margins. After ten consecutive quarters of estimated stock draws, refined product balances are expected to be back in positive territory in the first half of 2023.
• Russian oil exports increased by 270 kb/d to 8.1 mb/d, the highest since April as diesel exports rose by 300 kb/d to 1.1 mb/d. Crude oil loadings were largely unchanged m-o-m, even as shipments to the EU fell by 430 kb/d to 1.1 mb/d. Loadings to India reached a new high of 1.3 mb/d. Export revenues, however, dropped $0.7 bn to $15.8 bn on lower prices and wider discounts for Russian-origin products.
• Global observed inventories fell by 23.2 mb in October as product stocks fell for the first time since March and crude oil saw a smaller build. OECD industry stocks increased by 17.3 mb, to 2 765 mb, narrowing the deficit versus the five-year average to 150.2 mb, but OECD government stocks fell by 19.9 mb. Preliminary data for the US, Europe and Japan show industry stocks increased by 3.1 mb in November.
• Benchmark crude oil futures plunged by around $8-9/bbl over the course of November and a further $5/bbl in early December, as macro-economic headwinds took centre-stage and apprehension about OPEC+ cuts and EU embargoes faded. Nearby time spreads slumped amid growing evidence of a comfortably supplied Atlantic Basin, sending the front-end of the Brent and WTI curves into contango for the first time this year. At the time of writing, ICE Brent traded at $80/bbl and Nymex WTI at $75/bbl.
  

A weak macroeconomic environment and ample supply have knocked around $15/bbl off benchmark crude prices over the past month. The sell-off comes despite lower OPEC+ production, an EU embargo on Russian crude oil coming into full force and a relaxation of China’s Covid restrictions that could pave the way for a quicker demand recovery in the world’s second largest oil consumer. At the time of writing, ICE Brent futures were around $80/bbl while NYMEX WTI had slumped to $75/bbl.

Russian prices saw steeper declines. Urals in Northwest Europe fell nearly $30/bbl to $43/bbl by early December, well below the $60/bbl price cap finally agreed by G7, Australia and the EU. The price cap aims to facilitate trade with Moscow by allowing third-party buyers to use EU maritime services as long as they conclude purchases below that limit. But Russia maintains it would rather cut output than to sell oil to countries that impose the cap.

For now, Russian oil continues to flow. In November, total oil exports increased by 270 kb/d to 8.1 mb/d, the highest since April. Crude oil loadings were unchanged on the month at just over 5 mb/d, despite a 430 kb/d drop in shipments to Europe. By contrast, product flows (in particular of diesel) surged, including to Europe. Russian oil production rose 90 kb/d to 11.2 mb/d, just 200 kb/d below pre-invasion levels.

Along with a recovery in Kazakh and Nigerian production after months of operational challenges, that increase went some way to offset lower supply from other OPEC+ producers. The bloc cut its collective output ceiling by 2 mb/d from November, but actual crude production fell by only a quarter of that as most of the members were already producing well below their targets. As for non-OPEC+ countries, output rose for a third consecutive month and was up by an impressive 3.1 mb/d since the start of the year, largely due to strong performances in the US, Brazil and the North Sea.

Preliminary data show OECD crude oil stocks drew in November, reflecting a sharp rise in refinery demand. Global refinery runs surged by an estimated 2.2 mb/d last month, to 82.3 mb/d, the highest since January 2020. Increased supply of diesel and gasoline coincided with a seasonal lull in transport fuel demand, boosting product stocks which pulled refinery margins lower. In the US and Europe, diesel cracks made record monthly falls from October’s historical peaks, but remain high.

Despite the seasonal slowdown in world oil demand and continued macro-economic headwinds, recent oil consumption data have surprised to the upside. This was especially apparent in non-OECD regions, including China, India and the Middle East. By contrast, OECD oil demand remained depressed as weak European and Asian petrochemical activity outweighed ongoing gas-to-oil switching in manufacturing processes. Oil demand is now forecast to rise by 2.3 mb/d in 2022 and a further 1.7 mb/d next year, up around 140 kb/d compared with last month’s Report.

While lower oil prices come as a welcome relief to consumers faced by surging inflation, the full impact of embargoes on Russian crude and product supplies remains to be seen. As we move through the winter months and towards a tighter oil balance in 2Q23, another price rally cannot be ruled out.