Oil is in temporary excess

Oil supply will exceed demand in the first quarter, but the market may return to balance in the second quarter, and go into deficit in the second half of the year, according to the January forecast of the International Energy Agency (IEA) for the oil market. The main driver of demand growth may be an increase in business activity in China after the removal of coronavirus restrictions, but on the supply side, the situation with Russian production remains the main factor of uncertainty: in December, Russian exports of oil and petroleum products, according to the agency, decreased by 200 thousand barrels per day ( b/s) – up to 7.8 million b/s.

Demand for oil this year will grow by 1.9 million b/d to 101.7 million b/d (this is 80 thousand b/d more than in the previous forecast), and half of this increase should come from increased consumption in China amid the lifting of coronavirus restrictions, follows from the January forecast of the IEA. Recall that the easing of restrictions started in early December, when the country’s authorities announced the rejection of hard lockdowns without a pronounced need, and from January 8, quarantine and PCR testing for people arriving from abroad were completely canceled in the country.

Oil supply could rise by just 1 million b/d this year, to 101.1 million b/d, after a jump of 4.7 million b/d in 2022. The IEA expects production outside OPEC+ to increase by 1.9 million b/d, while in the countries participating in the deal it will decrease by 870 thousand b/d (in 2022, the block increased production by 3.1 million b/d) . With the exception of Russia, however, OPEC+ could increase supplies by 460,000 bpd. In the US, production for the second year in a row could be at record levels and increase by 1.6 million b / d (to 12.5 million b / d), which will allow the country to outpace Saudi Arabia. Delivery growth is also expected in Canada, Brazil, Norway and Guyana. In the first quarter, oil supply will exceed demand, in the second quarter the market may reach a balance, but in the second half of the year it will face a pronounced deficit, the IEA expects.

In December, the total oil production decreased by 860 thousand b/d compared to November, the supply of OPEC + countries decreased by only 70 thousand b/d, including Russian production – by 30 thousand b/d, to 9.77 million bpd. In total, with condensates, the production level amounted to 11.2 million b/d, which is 190 thousand b/d less than before the start of the Russian military operation in Ukraine (an average increase of 210 thousand b/d for the year). The IEA predicts that by the end of the first quarter, the reduction in production compared to February last year will reach 1.6 million bpd, and the average production level for the year will be 9.7 million bpd.

At the same time, Russian exports of oil and oil products in December decreased by 200,000 b/d to 7.8 million b/d (crude oil — decreased by 270,000 b/d, oil products — increased by 80,000 b/d c), as deliveries to the EU countries decreased against the background of the entry into force of the embargo on the import of Russian oil (from February it will also affect the import of petroleum products). Year-on-year deliveries to the EU decreased by 400,000 bpd to 3 million bpd, while Russia’s share fell from 45% to 39%. In December, 1.9 million b/d came from China, 1.6 million from India, 0.4 million from Turkey and 1.7 million b/d from unknown destinations. Note that Russian oil is still supplied at prices below the ceiling ($60 per barrel) imposed by the G7 countries: the average price of Urals for the month by January 14 was $46.82, the Ministry of Finance of the Russian Federation reported the day before (in December it was higher – $50.47 per barrel, on average for the year – $ 76.09 per barrel).

According to the IEA, the decline in prices for Urals led to a reduction in revenues from the export of oil and petroleum products by $3 billion mom to $12.6 billion (the lowest since February 2021), although exports of petroleum products reached a record of 1.2 million b/d , of which 720 thousand b/d was intended for Europe.

Tatyana Edovina