Oil markets at mercy of volatility but balanced fundamentals offer some hope

INTERNATIONAL crude oil markets will likely flirt with volatility on macroeconomic considerations, even though Dated Brent prices are expected to average above US$80/b in coming months, as supply risks and strong Asian demand temper the impact of bearish events including those triggered by the Credit Suisse turmoil.

“Dated Brent prices should average US$82-$85/b for the next few months before increasing into the upper US$80s to $90/b later in the year,” as inventory levels will grow more slowly and ultimately shift to declines around mid-year, S&P Global Commodity Insights said in its latest March Commodities brief.

Persistent geopolitical supply risks, falling inventories, expectations of the OPEC+ group’s efforts to maintain market balance, as well as hopes of resurgent China demand, will stay dominant themes, although the tumult stirred by the Swiss bank, caused by its liquidity and the slump in its share price, have fueled concerns of a broader financial crisis that could escalate brewing risks of a global recession.

Reflecting fears of a spreading banking crisis, Platts, part of S&P Global, assessed Dated Brent at a 15-month low of US$71.84/b March 15.

UBS, another Swiss Bank, subsequently agreeing to buy Credit Suisse should restore some semblance of calm. Dated Brent was assessed little-changed at US$71.705/b March 20 as news of the takeover percolated but edged up to reach US$73.775/b March 22.

Asia’s demand push

Asia is expected to contribute over 70% of global oil demand growth in 2023, S&P Global said, noting that for the second year in a row, jet fuel and kerosene demand is forecast to grow the most in volume, followed by gasoline and diesel.

Global oil demand is forecast to reach 104.8 million b/d in 2024, up 2.3 million b/d from 2022 and 2.6 million b/d higher than in pre-pandemic 2019, it added.

India was the key driver of Asia’s oil demand growth in 2022 and will contribute about 17% of regional growth this year, with the country’s overall oil demand in 2023 expected to be 7% above levels in 2019, compared with 3% higher for all of Asia, S&P Global has projected.

India’s PMI’s for both manufacturing and services remained above the 50-threshold level in January, pointing to an expansion in these sectors. The overall S&P Global composite PMI index strengthened to 59 in February from 57.5 in January, with the latest reading pointed to the 19th straight month of growth in private sector activity.

To cater to strong demand and to ensure its oil supply strategy does not encounter hurdles if Russia faces additional sanctions over its war in Ukraine, India has also intensified discussions with the US for crude oil imports.

India’s imports of Russian crude surged to 700,000 b/d in 2022 from 100,000 b/d in 2021, boosting the market share of Russian crude in India's overall crude import basket to around 15% from 2.2% over the same period.

S&P Global expects India’s Russian crude imports to increase further to around 1.2 million-1.5 million b/d in 2023 and comprise around 25%-30% of its total crude imports.

China is also expected to provide bullish momentum to oil demand in 2023 as it reopens after pandemic lockdowns that continued until late last year.

During the second half of 2023, China is expected to drive world oil demand to record levels, the International Energy Agency said in its latest monthly oil market report, adding the global economic outlook has benefitted from China’s economic momentum, with rebounding February PMI data and robust air traffic demand.

Also noteworthy is China’s increasing crude imports from Russia as it snaps up attractively priced Russian crudes shunned by the West.

China's crude oil imports from Russia surged to a record high of 2.01 million b/d (7.69 million mt) in February, General Administration of Customs data released March 20 showed.

S&P Global expects the uptrend to continue in March when imports of Urals crude from Russia are likely to hit a 33-month high, with PetroChina and independent refineries both seen to be receiving hefty deliveries.

OPEC+ supply considerations

The OPEC+ coalition’s crude oil production fell by 80,000 b/d in February, the latest Platts survey by S&P Global Commodity Insights found, with volumes dropping in Iraq, Angola and Kazakhstan.

The decline came despite a small increase in Russian output of 10,000 b/d to 9.86 million b/d as the key OPEC ally continued to show resilience to western sanctions targeting its oil sector.

With several countries still struggling to raise or even maintain output due to internal disruptions or lack of investment, the OPEC+ alliance continues to massively underproduce its quotas, even with the group agreeing to slash them by 2 million b/d from November 2022 through end 2023.

Overall OPEC+ compliance among countries with quotas was 153% in February, according to S&P Global calculations, meaning the 22 members combined were still 1.91 million b/d short of their production targets. Gains in demand growth will likely allow OPEC+ to avoid reducing quotas in H2. The OPEC+ monitoring committee set to meet April 3, when further cues could emerge on its future strategy.

Meanwhile, the threat of further sanctions by the West on Russia also keeps the market underpinned.

According to the Chinese Zodiac Calendar, 2023 is the Year of the Rabbit, with the animal symbolizing hope, longevity, peace, and prosperity. Only time will tell whether the coming months usher in a period of calm or more global uncertainty.

Surabhi Sahu, Senior Editor, S&P Global Commodity Insights.

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