The current move up started in July. ICE Brent has rallied 15%, CME Heating Oil 29% and RBOB 18%. At the end of June US retail gasoline sold for $3.685/gallon. Fast forward 6 weeks and it is 7% more expensive. Diesel retail prices have increased from $4.623/gallon to $4.837/gallon. In the light of this unambiguous uptrend, one might conclude that the 0.2% month-on-month rise in US consumer prices is more than encouraging. On an annual basis both headline and core inflation figures registered a smaller than expected jumps – 3.2% and 4.7% respectively. Although the former picked up from June because of the lower base in July 2022, the undeniable fact is that the rise in consumer prices is being mitigated. After the release of the updated figures investors have grown in conviction that the US central bank will halt the rate increase come September and the voices of those betting on cuts next year are getting louder. Economic headwinds triggered by recent hikes might start abating shortly.

The latest data set, which also showed weekly jobless claims rising above expectation, is certainly a welcome development, nonetheless equities settled well under the day’s peaks and oil also retreated meaningfully after the recent confident run higher. Chinese economic woes and the deflationary pressure are still hanging as the sword of Damocles above markets and a full-blown recovery will only be expected when the second biggest economy of the world displays tangible signs of improvement. The downward revision in OPEC calls, detailed below, might have also added to the temptation to shed some length, nonetheless the oil balance is set to tighten considerably in coming months making any retracement plausibly brief.

GMT +1	Country	Today’s data	Expectation
13.30	US	Producer Price Index July	0.2%
15.00	US	Michigan Consumer Sentiment	71

 

Gigantic Adjustment Courtesy of Russian Supply

Headlines say that oil market fundamentals will remain healthy for coming quarters, and they are accurate. The updated OPEC data on global oil balance shows robust call for the organization’s oil throughout 2024. Demand is reassuringly upbeat. This year’s growth rate is 2.43 mbpd. Global oil consumption is to reach 102.00 mbpd, the highest annual reading. The fourth quarter of the incumbent year will demand 103.21 mbpd of the black stuff. This then will increase by 2.11 mbpd a year later when demand is forecast to be 105.32 mbpd averaging at 104.25 mbpd in 2024, an annual increase of 2.25 mpd.

These cheerful projections suggest that OPEC is sanguine on global economic prospects. Worldwide GDP growth was revised up to 2.7% for 2023 and 2.8% for 2024 with China, India and Japan unchanged, the US slightly better but the euro zone a tad worse. The relentless rise in global consumption based on upbeat economic outlook occurs almost exclusively in the non-OECD part of the world – 2.4 mbpd this year and close to 2 mbpd in 2024. To narrow it further down combined demand increase in China and India will be 1.16 mbpd in 2023 and 800,000 bpd in 2024. Economic data from the world’s two most populous countries will keep playing a pivotal role in shaping investor’s sentiment and global oil demand outlook.

Non-OPEC supply growth will not be able to catch up with the increase in consumption. For 2023 it will stand at 1.5 mbpd and in 2024 the expansion is estimated to be 1.4 mbpd – hence the solid increase in OPEC call. The main drivers of this growth will be Brazil, China, Guyana, Kazakhstan, Norway and the US with the latter being a wildcard. A significant amendment is observed in 3Q 2023 non-OPEC supply. It is now stands to be 66.96 mbpd, up from 66.53 mbpd in last month’s update. The main culprit for this upgrade is Russia, whose 3Q 2023 supply estimate was increased by 380,000 bpd from July. This considerable revision filters through the subsequent quarters and through OPEC calls.

Because of this salient correction demand for OPEC oil was cut by 440,000 bpd for 3Q 2023, by 230,000 bpd for 2H 2023 and by 120,000 bpd for the whole of 2024. These are undoubtedly significant adjustments but before the obituary of the oil bull is being written it is a useful exercise to take a look at the absolute figures in conjunction with actual and perceived OPEC production estimates. For the next three quarters the call on OPEC should be 29.57 mbpd, 30.75 mbpd and 30.05 mbpd respectively. OPEC in July pumped 27.31 mbpd, a monthly decline of 810,000 bpd. The 10 member states with production ceilings produced 22.60 mbpd, 1.76 mbpd under their collective allocations. This underachievement is partly the result of declared/unilateral cuts (Saudi Arabia) and partly unintentional reductions (Nigeria, Angola). Calculating with the July figure for 3Q would be a fair assumption given the recent announcement from the Kingdom to extend the self-imposed constraint throughout September. It would imply a global stock depletion of 2.3 mbpd. Even if the alliance decides to gradually put back some of its oil to the market in 4Q 2023 and 1Q 2024 the solid increase in OPEC call will guarantee continuous stock draws for months to come. Taking OPEC’s global demand and non-OPEC supply estimates at face value the enormous power the group wields over the global oil balance becomes evident.

This influence foretells protracted stock draws globally and in the developed part of the world. OECD oil inventories might fall to 2.77 billion bbls in the current quarter and to 2.7 billion bbls by the year-end and whilst these estimates are higher than the figures based on the July numbers they still hint at solid backwardations across the board and gradually rising prices with Brent averaging just above $93/bbl as 2023 draws to an end. 

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