The outlook for the oil market and prices in 2023 remains highly uncertain amid a myriad of negative and positive risk factors, National Bank of Kuwait (NBK) said in a report Thursday.
While the outlook for the next couple of months remains weighed down by demand-impacting macroeconomic concerns, specifically OECD recession fears and lagging Chinese consumption growth, in the second half (H2) of the year, supply-side pressures stemming from Opec+ production cuts will increasingly come to the fore, NBK noted.
Allied to expectations of increased oil consumption over the summer months and especially in China and the Far East, the market is expected to flip from a surplus to a deficit, with the result that prices should begin to firm quite a bit from current levels.
The global economic growth forecast this year was trimmed by the International Monetary Fund (IMF) in its April World Economic Outlook (-0.1% pts to 2.8%), citing higher interest rates and heightened risk of financial system turmoil.
Underwhelming economic readings in the US, particularly GDP, retail sales and jobs also added to headwinds, while in China manufacturing unexpectedly contracted in April, according to the official PMI.
These developments as well as more recent concerns about the US defaulting on its debt in the absence of congressional approval to raise the debt ceiling were behind oil’s tumble to a fresh year-low of $72.3/b in early May, NBK said.
Moreover, refining margins for petroleum products such as diesel, a key gauge of industrial activity and transportation, have also signalled some weakness in the Far East, amid sub-optimal demand and stock builds.
Compounding matters and stoking volatility has been the decline in oil market liquidity, it said.
Open interest (the number of outstanding Brent futures and options contracts) declined by 4.7% to 2.15mn contracts by May 2, while money manager net length continued to retreat as speculators increased positions on prices falling amid palpable bearish sentiment.
Nevertheless, the consensus among energy agencies and analysts is that global oil demand will eventually accelerate in the second half (H2) of the year, led mainly by China and other non-OECD countries.
Despite the near-term softness, Chinese GDP growth in Q1, 2023 actually surprised on the upside at 4.5% year-on-year (y-o-y), and both the International Energy Agency (IEA) and Opec see China as the impetus for their improving oil demand forecast through the rest of the year.
They left their demand growth forecasts (annual average) unchanged for 2023 at 2mn bpd and 2.3mn bpd respectively in their April oil market reports.
On the supply side, Opec+’s surprise output reduction will likely deepen the anticipated supply shortages in H2, 2023, with the result that oil supply will likely start undershooting oil demand before the end of the current quarter.
Based on IEA oil demand and non-Opec crude projections and assuming Opec+ cuts are adhered to for the rest of the year and there is no meaningful increase in output by members currently under-producing relative to their targets, NBK sees the supply deficit widening and implied stock draws of as much as 2.5mn bpd in Q4, 2023.
