The major price driver in our market last week was the decision by the two OPEC+ heavyweights and now seemingly inseparable allies, Saudi Arabia, and Russia, to extend production/exports constraints totalling 1.3 mbpd until the end of the year. Whether the move is aimed to merely ensure elevated price levels for the remainder of the year (and maybe beyond) or it is blatant demonstration of the side the Kingdom is taking on Cold War II is open to interpretation. The bottom line is that the co-ordinated commitment achieved the desired effect and the market, in its reaction to the latest development, was as pragmatic as ever. It quickly reacted to the possibility of even more robust drawdowns in global oil inventories than anticipated earlier. Although towards the end of the week focus briefly shifted to macro-economic considerations, the supply side of the oil equation and its ebullient impact on the balance eventually triumphed. The oil complex managed to finish the latest 5-day period convincingly in the black. WTI gained $1.95/bbl and Brent $2.10/bbl. Both Heating Oil and Gasoil found their mojo on Friday and registered weekly gains of $8.15/bbl and $9.70/bbl equivalent.

But just how significant stock depletion can be anticipated in the light of the extended supply cuts and what to aim for in revising the oil balance for the last quarter of the incumbent year? To come up with an approximation we use the old-fashioned and unconditionally accurate method of shooting first and whatever we hit we call it the target. It is reasonable to use estimates from the research arm of the OPEC group since presumably decisions are based on those projections. Last month’s prognosis predicted a demand of 30.75 mbpd for the organization’s oil. We assumed an OPEC production 28.9 mbpd in August, leaving us with a global stock draw of 1.85 mbpd.

This forecast now seems conservative. According to S&P Global Commodity Insight the group pumped 27.53 mbpd in August. The 10 members with output ceilings produced 22.67 mbpd with the collective quota at 23.357 mbpd. (Voluntary cuts from Algeria, Gabon, Iraq, Kuwait, Saudi Arabia, and the UAE are accounted for.) Using the combined output levels for 4Q of 2023 we end up with a global stock draw of 3.22 mpd. It is a jaw-dropping number, considerably higher than the amended assessments of 2-2.3 mbpd from other researchers. When it is applied, mutatis mutandis, to OECD commercial oil inventories one will find that the developed part of the world will bid farewell to 2023 with inventories at 2.634 billion bbls, more than 200 million bbls under the seasonal historical average. Using current OECD consumption data it would cover 57 day of forward OECD demand, down from 61 days in the corresponding quarter of 2022.

The 4Q 2023 outlook could be exacerbated if the Russian pledge of taking 300,000 bpd off the export market is deducted from non-OPEC supply or mitigated in case a.) member countries that considerably underachieve, the likes of Angola, Nigeria or Azerbaijan in the non-OPEC group, manage to produce close to their maximum allocations or Iran backs up its words of significantly raised production by hard data and b.) macro-economic malaise will have a profoundly adverse impact on global oil demand predictions. The updated views on the global oil balance due out this week (EIA and OPEC tomorrow, the IEA a day later) will be thoroughly scrutinized. What seems plausible is that if our calculation on stock movements proves even remotely unerring then a sugar rush in oil prices will be continue. On the other hand, it is also obvious that the extent of the envisaged daily stock draws cannot remain sustainable beyond this year without causing a tangible rise in geopolitical tension between consuming and producing nations and inflicting severe damage on the global economy just when unbridled consumer prices caused by the health crisis and the Ukrainian invasion seem to be reined in.

US Stocks, the Harbinger of Things to Come

So, global and OECD stock plummet is pencilled in for the last three months of 2023 and this view is reinforced by recent developments in the US, the world’s biggest consumer (and producer), which is responsible for holding around 45% of total OECD inventories. Commercial oil inventories, albeit they rose tepidly last week because the irrevocable seasonal drawdown in the ”other products” category has not started in earnest yet, have thinned 18 million bbls over the past 5 weeks and they register a deficit of 2.5% to the 5-year norm. This tendency is chiefly the function of considerable declines in crude oil stocks that plundered from 467 million bbls at the beginning of June to 417 million bbls last week. The upcoming refinery maintenance might help this trend temporarily stagnate or even reverse (and deplete product stockpiles), however, the backwardated nature of the US crude oil benchmark coupled with persistently high borrowing costs will continue to disincentivize storing crude oil.

On the product side of the inventory coin both gasoline and distillates are under the 5-year average; the former by 3.4% and the latter by 11.9% respectively. Although distillates are 6.8 million bbls or 6.1% higher than during the same week of 2022 due to the panic stock building in the aftermath of the start of the Russian aggression against Ukraine, it is the middle of the barrel that is prone to further declines and price spikes. Current inventories would barely cover 30 days of forward demand (it was 35-36 days in September 2021), the G7 boycott on Russian exports could trigger a race for available diesel and distillate barrels, of which Europe is structurally short and the OPEC+ cuts chiefly impact heavier and sourer crudes, which is the feedstock to produce distillates. The changes in US oil inventories in coming weeks and months will play an outsized role in foretelling how tight the global oil balance could be towards the end of this year.

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