The muted price re-action to last week’s encouraging demand estimates, falling OPEC+ supply, declining inventories and mitigated inflationary pressure is a warning signal that unless China joins the party the path upwards will be paved with pitfalls. It appears that the fight against inflation is being won. (Let us hope this bright assessment will not come back to haunt us). US consumer inflation, both headline and core, is being kept under control and the Fed might opt for pausing the hikes in interest rates at its September meeting for the rest of the year and could start contemplating cutting it starting 2024.

Oil is supported by declining stocks, which is the outcome of constrained output and healthy consumption. Product outlook is particularly tight. The two major crude oil contracts hardly managed to eke out gains last week. WTI settled 0.45% higher and Brent gained 0.66%. Products fared much better with Heat jumping 1.94% and RBOB rallying 6.53%. Equity markets were sluggish at best. The MSCI All-Country Index lost 0.63%, the Nasdaq Composite Index 1.94% and the Shanghai Composite Index 3%.

Investors are seemingly growing in conviction that inflation in the western part of the world is being reined in and recession should be avoided but their view on China is ambivalent. And they cannot be blamed for it. The country’s exports and imports are declining, consumer prices are deflated due to subdued demand, the manufacturing sector has been shrinking, new bank loans are plunging, credit growth is weakening, and July crude oil imports declined 19% on the month and was at its lowest since January. Doubts have started to emerge that even the moderate 5% official growth target will prove somewhat utopian. It is obvious that without a sturdy Chinese economic recovery, global gross prospects will remain somewhat sombre. Tomorrow’s data on industrial output and consumer spending will be closely watched for clues.

Solid Consensus on Buoyant Demand

As the acronym implies, the OPEC group is the umbrella organization of the largest oil exporters in the world. The elementary objective of these producers is to achieve prices as high as price as possible. The IEA is the energy watchdog of the OECD nations. These countries are amongst the biggest oil consumers on the planet, consequently, uncontrollably galloping oil prices can severely hurt their economies. Yet, there is an agreement between the two groups that global oil demand will grow unabated and scale new annual summits in 2023 and 2024.

In Friday’s note we detailed the findings from OPEC. The IEA, judging by its updated report, supports the upbeat view. It expects global oil consumption to average at 102.15 mbd this year and 103.00 mbpd in 2H 2023. It will expand by a further 1 mbpd, to 103.15 mbpd in 2024. In tandem with the healthy demand growth the extended supply cut from Russia and Saudi Arabia entails considerable stock depletion in the third quarter. Should the producer alliance stick with the current strategy the supply deficit would be as high as 2.2 mbpd in 3Q and 1.2 mbpd in 4Q supporting prices. On the other hand, the agency warns, the current production constraints are the harbinger of rising spare capacity providing ample breathing space to increase output if needed or decided.

Another price supportive factor, according to the IEA, is refiners’ inability to catch up with elevated product demand due to high temperatures, outages and the shift to new feedstocks. Gasoline and diesel margins are tight although naphtha is under pressure. The latest IEA Global Indicator Refining Margins table saw NWE light sweet cracking margins, for example, doubling from $5.47/bbl in April to $10.82/bbl in July.
The call on OPEC is to average 29.95 mbpd in 2H 2023 – 29.90 mbpd in 3Q and 29.80 mbpd in 4Q. These are downgrades from July implying deteriorating oil balance but given the OPEC+ group reluctant supply management policy global, OECD stocks will plunge markedly during the remainder of 2023.
Next year, however, might not be as bright as the current one and herein lies the main difference of opinions between OPEC and the IEA. The former will expect demand growth outstrip non-OPEC supply growth effectively betting on rising demand on OPEC oil. The latter expects global consumption to rise by 1 mbpd against a swelling of 1.3 mbpd in non-OPEC supply. Demand for OPEC oil will be just over 30 mbpd for the whole year, according to OPEC and 28.93 mbpd, the IEA reckons. The gap is even greater in 1Q 2024. The need for OPEC’s oil 2.05 mbpd less in the IEA’s view than that of OPEC (28.00 mbpd versus 30.05 mbpd). Whilst uncertainty will arise come 2024 the balance of 2023 will be characterized by notable supply deficit.

The Impact of OPEC+ Cuts

One of the reasons for perceived tight oil balance is plummeting OPEC+ production. It partially stems from involuntary output constraints. Combined underproduction from Angola, Nigeria, Azerbaijan, and Malaysia stood at 1.16 mbpd in July, independent consultants and tanker trackers estimate. Then there is the unilateral Saudi reduction amounting to 1 mbpd from Saudi Arabia with Russia’s pledge to reduce exports by 500,000 bpd from the February level has been broadly fulfilled. According to the official narrative the move is aimed to provide stability, but the welcome side effect is an increase in daily oil revenues. The current 1 mbpd constraints started in July and will run throughout September, at least. It resulted in a $100 million rise in daily petrodollar income as 800,000 bpd decrease in OPEC output from June to July was exceeded by the $6/bbl jump in the OPEC+ basket price, to $81.06 in July. The month-to-date price is at $87.58/bbl ostensibly leading to another significant increase in oil revenues. Sanguine demand backdrop coupled with declining OPEC production