Oil Market Report - June 2022

• 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. In contrast to 2022 when the OECD led the expansion, non-OECD economies are set to account for nearly 80% of growth next year.
• 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. As for OPEC+, total oil output in 2023 may fall as embargoes and sanctions shut in Russian volumes and producers outside the Middle East suffer further declines. Assuming Libya rebounds from a steep drop, the bloc’s production could increase 2.6 mb/d this year, eroding its spare capacity cushion.
• 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. While diesel cracks eased month-on-month in May, both jet fuel and gasoline cracks surged as demand picked up seasonally.
• Following nearly two years of declines, observed global oil inventories increased by 77 mb in April. 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. Preliminary data for May show total OECD stocks building by 6 mb.
• Despite economic headwinds, 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. North Sea Dated hit $127.9/bbl on 13 June.

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

Higher oil prices and a weaker economic outlook continue to temper our oil demand growth expectations. But in 2023, a resurgent China will boost non-OECD demand growth, offsetting a slowdown in the OECD. Following gains of 1.8 mb/d this year, world oil demand is forecast to expand by 2.2 mb/d to 101.6 mb/d in 2023.

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. EU countries have agreed to ban 90% 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. Non-OPEC+ producers, led by the US, will add 1.9 mb/d of supply in 2022 and 1.8 mb/d next year. Nevertheless, to keep the implied balance from tipping into deficit OPEC+ would have to further tap into its dwindling capacity cushion, reducing it to historic lows of just 1.5 mb/d.

For now though, oil inventories are rising and IEA Strategic Petroleum Reserve releases have helped reverse persistent declines in OECD industry stocks. Preliminary data show global oil stocks increased by 77 mb in April and made further gains in onshore stocks in May, yet oil prices continued their upward trajectory. At the time of writing, ICE Brent was trading at around $124/bbl, up 11% on a month ago and 70% 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.

But as the refinery maintenance season winds down in the US, Europe and Asia and a rebound in Chinese throughputs gathers pace, 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. A further 1.9 mb/d increase is expected next year, supported by new refinery start-ups in Africa, the Middle East and Asia. However, shortages in individual products may well persist due to uneven rates of demand growth and limits in the refining system. Diesel and kerosene supplies remain of particular concern. OECD industry stocks of middle distillates have fallen by 25% 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 which could cause more pain at the pump just as pent-up demand is unleashed during the peak driving and summer cooling season.