Output from OPEC+ to go down in 2023 as sanctions take their toll on Russian volumes

The energy security crisis, which came into being following Russia’s attack on Ukraine, has resulted in tighter supplies and higher prices, leading to an uncertain outlook for the global oil supply. However, the International Energy Agency (IEA) believes that non-OPEC+ will take over the supply helm from OPEC+ next year due to potential declines in production from producers outside the Middle East and sanctions, which have been imposed on Russia.

The International Energy Agency’s latest IEA Oil Market Report (OMR) reveals that world oil demand is forecast to reach 101.6 mb/d in 2023, surpassing pre-pandemic levels. While higher prices and a weaker economic outlook are moderating consumption increases, a resurgent China will drive gains next year, with growth accelerating from 1.8 mb/d in 2022 to 2.2 mb/d in 2023, says the IEA. Non-OECD economies are set to account for nearly 80 per cent of growth next year in contrast to 2022 when the OECD led the expansion.

According to IEA, non-OPEC+ is set to lead world supply growth through next year, adding 1.9 mb/d in 2022 and 1.8 mb/d in 2023, while OPEC+’s total oil output in 2023 may fall as embargoes and sanctions shut-in Russian volumes due to the Ukraine crisis and producers outside the Middle East suffer further declines. If Libya rebounds from a steep drop, the bloc’s production could increase 2.6 mb/d this year, eroding its spare capacity cushion, as outlined by the IEA.

Furthermore, global refining capacity is set to expand by 1 mb/d in 2022 and 1.6 mb/d in 2023, boosting throughputs by 2.3 mb/d and 1.9 mb/d, respectively. Nevertheless, product markets are expected to remain tight, with a particular concern for diesel and kerosene supplies, as explained in the report. The research shows that both jet fuel and gasoline cracks surged as demand picked up seasonally, while diesel cracks eased month-on-month in May.

Following nearly two years of declines, the IEA says that observed global oil inventories increased by 77 mb in April while OECD industry stocks also rose, by 42.5 mb (1.42 mb/d), helped by government stock releases of nearly 1 mb/d. At 2 669 mb, OECD industry stocks were nevertheless 290.3 mb below the 2017-2021 average and preliminary data for May show total OECD stocks building by 6 mb.

Despite economic headwinds, the International Energy Agency confirms that steady demand for light sweet crude in a tight physical market is boosting marker grade prices as they are in the same crude quality family. Since 6 June, WTI and Brent futures have averaged over $120/bbl while North Sea Dated hit $127.9/bbl on 13 June.

The International Energy Agency points out that slowing demand growth and a rise in world oil supply through the end of the year should help world oil markets rebalance after seven consecutive quarters of hefty inventory draws. However, if sharper Libyan losses persist and the OPEC+ spare production capacity cushion erodes as tougher sanctions on Russia come into full force and oil demand in China recovers from Covid-lockdowns, this situation might prove short-lived.

Moreover, the IEA elaborates that even though higher oil prices and a weaker economic outlook continue to temper its oil demand growth expectations, a resurgent China is expected to boost non-OECD demand growth in 2023, offsetting a slowdown in the OECD. In 2023 world oil demand is forecast to expand by 2.2 mb/d to 101.6 mb/d, following gains of 1.8 mb/d this year.

The international intergovernmental organisation further outlines that the global oil supply may struggle to keep pace with demand next year, as tighter sanctions force Russia to shut in more wells and a number of producers bump up against capacity constraints. As EU countries have agreed to ban 90 per cent of the bloc’s imports of Russian crude and oil products – to be phased out over the next six to eight months – modest increases from OPEC+ will provide a partial offset, but non-OPEC+ will dominate gains for the remainder of the year and in 2023.

In lieu of this, non-OPEC+ producers, led by the U.S., are expected to add 1.9 mb/d of supply in 2022 and 1.8 mb/d next year. Nevertheless, the IEA highlights that OPEC+ would have to further tap into its dwindling capacity cushion, reducing it to historic lows of just 1.5 mb/d, to keep the implied balance from tipping into deficit.

In the meantime, the intergovernmental organisation confirms that oil inventories are rising and IEA Strategic Petroleum Reserve releases, including the one from April, have helped reverse persistent declines in OECD industry stocks. While preliminary data show global oil stocks increased by 77 mb in April and made further gains in onshore stocks in May, oil prices continued their upward trajectory.

Additionally, ICE Brent was trading at around $124/bbl in June 2022, up 11 per cent from a month ago and 70 per cent higher than in June 2021. With the start of summer, gains in oil product prices and cracks have been even stronger as refinery output has failed to keep up with demand for key products, explains the IEA.

As the refinery maintenance season winds down in the U.S., Europe and Asia and a rebound in Chinese throughputs gathers pace, the intergovernmental organisation’s report indicates that global refinery activity is set for a solid recovery. Runs are forecast to rise by 3.5 mb/d from May through August, and by 2.3 mb/d for the year on average with a further 1.9 mb/d increase expected next year, supported by new refinery start-ups in Africa, the Middle East and Asia.

Regardless, shortages in individual products may well persist due to uneven rates of demand growth and limits in the refining system with diesel and kerosene supplies being of particular concern. Since OECD industry stocks of middle distillates have fallen by 25 per cent since January 2021 to their lowest levels since 2004, that very limited cushion is driving middle distillates prices to record highs, with a knock-on effect for other products.

The International Energy Agency predicts that this could cause more pain at the pump just as pent-up demand is unleashed during the peak driving and summer cooling season.