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  • Writer's pictureArbat Capital

Oil Market Report - July 2023

In July 2023, the crude oil market showed its most prominent monthly gain since January 2022, breaking well above the upper bound of a tight May-June trade range. Initially supported by additional supply cuts from OPEC+ states, the market got additional aid during the month from the weakening US Dollar and the overall risk appetite on the back of mixed US jobs report and better inflation figures.


EXECUTIVE SUMMARY


In July 2023, the crude oil market showed its most prominent monthly gain since January 2022, breaking well above the upper bound of a tight May-June trade range. Initially supported by additional supply cuts from OPEC+ states, the market got additional aid during the month from the weakening US Dollar and the overall risk appetite on the back of mixed US jobs report and better inflation figures. The improvement in the sentiment of oil traders was another positive factor as the net long positions of NYMEX WTI have increased by nearly 80% since the OPEC announced the latest round of production cuts. A technical factor was another issue supporting crude oil prices later in the months as both major benchmarks have broken through the upper bound of the channel of recent 2.5 months in the second part of July, triggering short-covering. As of July 26, the ICE Brent near-month future soared above $83 per barrel for the first time since the middle of April 2023, adding roughly 10.7% comparing to the end of June and posting its biggest monthly gain over recent 1.5 years. And the NYMEX WTI near-month delivered even more impressive monthly performance, skyrocketing by 12.4% by contrast to the end of June to $79.3 per barrel, also providing the best monthly dynamics since January 2022.

From a technical point of view, in July 2023, the oil market not only has broken the trade range of recent 2.5 months, but also has broken the upper bound of a downward channel persisted since July 2022, that provides additional confirmation of upward reversal on the market. Nevertheless, after a month-long upward streak, the crude oil market is overbought, at our opinion, and becomes more fragile to bad news. While tighter fundamentals are driving the uptick, market concerns over demand remain, with China the persistent focus of attention. So, we believe that only fresh announcements on further supply cuts or disruptions and/or strong signals confirming expected strength of demand in the 2nd part of the year could pushed the market higher in a short-term, while any negative news, including no prolongation of Saudi Arabia’s voluntary cuts for September, will be used by marker participants to take profit on long positions. In such circumstances, we expect a certain consolidation of the market on the levels achieved in August 2023 with possible testing of the support levels located now at $77-78 at ICE Brent and $74-75 at NYMEX WTI.

The price structure of futures on major crude benchmarks, ICE Brent and NYMEX WTI, strengthened significantly in July 2023 comparing to the end of June 2023 levels, when both ICE Brent and NYMEX WTI prompt spreads flipped into marginal contango for the first time since the start of the year. As backwardation improved mainly on the back of short-term supply tightening concerns, which lifted the prompt contracts the most of all, the futures curves steepened materially as well, comparing to the end of June. Meanwhile, persisting worries about the global economy and demand outlook in the 3Q23-4Q23 amid monetary policy tightening kept on pressing more distant contracts.

In June 2023, total production of oil in the world expanded by 0.66 mln bbl / d in compare to May 2023, or +0.7% MoM, and returned back above the level of 101 mln bbl / d, being very close to a post-pandemic high observed a couple of months ago. Comparing to a 5-year range, the production was higher in June 2023 than both an average level and an upper bound of the range for the corresponding month of a year for the 5th consecutive month. Also, pursuant to US EIA’s data, June 2023 was the 12th straight month of global oil output exceeding 100 mln bbl / d. In yearly terms, global oil production likewise expressed positive dynamics in June 2023, growing by 2.25 mln bbl by contrast to the level of June 2022, or +2.3% YoY, and demonstrating its 26th month of permanent increase.

According to the most recent IEA’s data, world oil supply rose 480 thsd bbl / d in June 2023 to 101.8 mln bbl / d, but is set to fall sharply in July 2023 as Saudi Arabia makes a sharp 1 mln bbl / d voluntary output cut. For 2023, the agency expects global production to increase by 1.6 mln bbl / d to 101.5 mln bbl / d, as non-OPEC+ to expand by 1.9 mln bbl / d. As for 2024, the IEA forecasts global supply to rise by 1.2 mln bbl / d to a new record of 102.8 mln bbl / d, with non-OPEC+ accounting for all of the increase.

OPEC total crude oil production strengthened in June 2023 after three consecutive months of weakening, increasing by 172 thsd bbl / d by contrast with the level of May 2023, or +0.6% MoM, according to cartel’s own data. Although Saudi Arabia announced additional voluntarily production cuts during the month, they have come effective only since July 1, so the OPEC had no new obligations to reduce its output in June. Despite to a certain rebound of the output, its volume remained rather suppressed in June 2023 in comparison with both pre-pandemic and post-pandemic highs. Thus, relative to a post-pandemic high of 29.65 mln bbl / d shown in August 2022, OPEC total crude oil production dropped by roughly 1.38 mln bbl / d, while relative to a pre-pandemic maximum of 32.0 mln bbl / d shown in November 2018 the output was lower in June 2023 by 3.75 mln bbl / d. Meantime, the IEA assessed OPEC’s total crude oil production in June 2023 as equal to 28.70 mln bbl and the EIA evaluated the figure as equal to 28.30 mln bbl / d, which is 429 thsd bbl / d and 24 thsd bbl / d higher than OPEC’s home estimate, respectively. According to cartel’s own estimates, OPEC-participating states delivered mixed production dynamics in June 2023 on a monthly basis. On one hand, the most significant expansion of the output within the month was observed in Saudi Arabia as the kingdom extended its crude oil supply by 179 thsd bbl / d comparing to the level of May 2023, or +1.8% MoM. Kuwait and the U.A.E. likewise exhibited a certain growth of crude oil production in June 2023 relative to a month ago. On the other hand, the most rapid fall of crude oil supply in June 2023 was recorded in Nigeria, where it contracted by 52 thsd bbl / d in compare to a month ago, or -4.1% MoM, sinking close to a lower bound of the range for the corresponding month of a year over recent 5 years.

Total production of oil by non-OPEC countries improved in June 2023 by 0.46 mln bbl / d relative to a month ago, or +0.7% MoM, reaching a new all-time high of 67.7 mln bbl / d. The most part of major non-OPEC oil producers delivered positive or, at least, flat monthly dynamics of production in June 2023, along with the overall figure. In absolute terms, Brazil showed the strongest monthly increase of the output among all not-participating in the cartel states, improving its production by nearly 160 thsd bbl / d in compare to the previous month, or +4.0% MoM. Although oil production kept on growing in Brazil at a rapid pace for the 3rd month in a row, this impressive growth was attributed mainly to a seasonal pattern of production in the country. Canada demonstrated a modest expansion of its oil output in June 2023 from a monthly dynamic standpoint as well, adding roughly 120 thsd bbl / d to the level of May 2023, or +2.2% MoM, and delivering the first monthly gain in recent 3 months. And the US experienced a certain increase of its oil output in the month under review on a month-over-month basis as well, equal to +60 thsd bbl / d relative to a month ago or +0.3% MoM. Nevertheless, the volume of oil extraction reached in the US its new high of 21.36 mln bbl / d on records.

The most part of constituents of US total oil production increased in June 2023 relative to the previous month, along with the top-line number, though US crude oil output softened again. Thus, production of crude oil contracted in the country by another 95 thsd bbl / d within the month, or -0.8% MoM, decreasing for the second consequent month and falling to a 6-month low. However, the weakness in crude oil output was more than compensated by expansion of NGLs and Renewable fuel production. The latter widened in June 2023 by 54 thsd bbl / d in compare to the level of May 2023, or solid +4.3% MoM, showing its second consequent month of expansion and reaching its new record high above 1.3 mln bbl / d. The same time, US production of NGLs experienced an expansion of 75 thsd bbl / d during the month under review, or +1.2% MoM, expressing permanent growth throughout 2 quarters in a row and likewise climbing up to its new peak value of 6.3 mln bbl / d. In turn, the monthly drop of crude oil production in the US in June 2023 was again driven purely by negative dynamics of conventional crude oil output, while shale oil output in the country proceeded to grow. Thus, production of conventional crude oil decreased in the US in June 2023 by 5.3% MoM, or -154 thsd bbl / d in comparison with the level of May 2023, experiencing a rapid decline for the second consequent month. The same time, production of shale oil went up in the US in the same month by 0.6% MoM, or +59 thsd bbl / d relative to a month ago, delivering permanent expansion in the course of 2 months in a row and reaching its new record high of 9.72 mln bbl / d.

The IEA revised its global oil demand forecast for 2023 down for the first time this year, citing the challenging economic environment, not least because of the dramatic tightening of monetary policy in many advanced and developing countries over the past twelve months. So, the growth in 2023 has been revised down by 220 thsd bbl / d, to 2.2 mln bbl / d from 2.4 mln bbl / d expected previously, with China poised to account for 70% of the total. While Chinese demand growth continues to surprise to the upside, a surge in domestic petrochemical activity has undermined steam cracker margins and activity elsewhere. Demand in the OECD, and Europe in particular, is languishing amid a grinding slowdown in industrial activity. African countries have seen imports and demand decline by higher retail fuel prices after subsidies were dismantled. Even so, the IEA has still expected global oil demand to rise seasonally by 1.6 mln bbl / d from 2Q23 to 3Q23, and to average 102.1 mln bbl / d for the year as whole. Also, the agency projected the growth to slow to 1.1 mln bbl / d in 2024, as the recovery loses momentum and as ever-greater vehicle fleet electrification and efficiency measures take hold.

Meantime, total demand for oil and petroleum products around the globe continued to strengthened in June 2023 for the second month in row, in accordance with EIA data, improving by 1.65 mln bbl / d on a month-over-month basis, or +1.6% MoM. In result, the volume of global oil consumption rose to its new post-pandemic high of 102.0 mln bbl / d, being equal or above this level for the third time in history, and, therefore, breached finally the range prevailing during last 2 years. Another period when the EIA recorded global oil demand exceeding 102.0 mln bbl / d was July-August 2019. In yearly terms, total demand for oil and oil products worldwide also exhibited a solid growth in June 2023, being 1.35 mln bbl / d higher relative to a year ago, or +1.3% YoY. As for yearly dynamics, the demand kept on growing or at least being flat in June 2023 for the 28th straight month.

A substantial 44.2 mln bbl build in non-OECD countries pushed global observed oil inventories up by 19.4 mln bbl in May 2023 to the highest since September 2021, according to the most recent IEA data, as China posted its largest monthly increase in crude stocks in a year, at a steep 1.1 mln bbl / d, fueled by a sharp rise in crude oil imports and despite near-record refinery throughput rates. China’s recent buying spree included heavily discounted Russian and Iranian barrels. By contrast, OECD oil stocks drew by a marginal 1.8 mln bbl. Global oil balances imply a marginal stock build in 2Q23. But with the surplus mostly in Chinese crude and US LPG tanks, ongoing draws in oil on water and deeper supply cuts starting this month suggest the oil market may soon see renewed volatility. Preliminary IEA data show a 9.2 mln bbl draw from the global inventories in June 2023. As for detailed IEA data on April 2023, total OECD commercial stocks of crude oil and petroleum products built up by 6.05 mln tons relative to the previous month, or +1.3% MoM, being throughout 11 consecutive months below the level of 480.0 mln tons and well below both an average and a lower bound of a range for the corresponding month of a year over recent 5 years. In yearly terms, the stocks declined in April 2023 by 10.89 mln bbl, or -2.2% YoY, showing the slowest pace of annual decline for more than 1.5 years.

Total US inventories of oil and petroleum products continued to drift sideways in June 2023 for the 6th month in a row, losing this time approximately 2 mln bbl in compare to the previous month, or insignificant -0.1% MoM. Despite to flat monthly dynamics of the overall oil stockpiles in the country, the volume of oil stored in the Strategic Petroleum Reserves (SPR) shrank again in June 2023, along with preceding months. The governmental oil inventories experienced a fall of another 6.7 mln bbl relative to the level of May 2023, or -1.9% MoM, delivering the fourth consequent month of decline and sinking to a new record low of 346.9 mln bbl for the whole history of observations. In turn, US commercial inventories of oil and refined oil products showed the opposite upward move and expanded by 4.7 mln bbl by contrast to May 2023, or +0.4% MoM, demonstrating an increase during consequent 3 months.

Global offshore inventories of crude oil increased considerably in June 2023 after two consequent months of nearly flat dynamics according to Vortexa, the cargo-tracking company, and widened by 12.8 mln bbl in compare to the level of May 2023, or +13.2% MoM. In result, the volume of the stocks ran to the highest level within preceding 2.5 years, though it has just returned to an average level for the corresponding month of a year over last 5 years. However, it should be noted that average levels of summer months are still affected by pandemic-related enormous inventories build up during the summer of 2020. From a point of view of yearly performance, global offshore inventories of crude oil also provided a solid growth in June 2023, even outpacing the one on a monthly basis. Thus, the inventories grew by 19.7 mln bbl over last 12 months, or +21.9% YoY, posting their 4th straight month of broadening in yearly terms.

AC - Oil Market Report - Jul-2023
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