In May 2023, the oil market continued to be highly volatile with Brent crude oil oscillating between the low $70s and the low $80s. Nevertheless, the recent price performance suggests transitioning from a bearish market in the second half of April to a somewhat more stable pattern in May.
In May 2023, the oil market continued to be highly volatile with Brent crude oil oscillating between the low $70s and the low $80s. Nevertheless, the recent price performance suggests transitioning from a bearish market in the second half of April to a somewhat more stable pattern in May. While the early part of the month was characterized by a significant downturn, later the prices demonstrated a degree of resilience and some upward momentum. As of May 26, ICE Brent near-month future settled at above $77 per barrel and NYMEX WTI is traded around $72.8, posting roughly $5.0 and $4.3 gains relative to the month lows, respectively. However, both benchmarks are heading for their second consecutive monthly decline in May, losing $3.2 (-3.9%) and $4.0 (-5.2%), as compared to the levels of April’s close.
Despite continued high volatility with sharp up and down price swings, the overall picture in crude oil futures remains the same with the prices fluctuating in a slowly downward channel for almost 6 months in a row. As for ICE Brent near-month contract, the level of $70.0 still should be considered as a very strong support with two failed tests in late-March and early-May, while the area above $85.0 looks like a natural resistance zone as the market has not been above of $90.0 since November 2022, though it has made several attempts to break up through the level.
The 35th OPEC and non-OPEC Ministerial Meeting scheduled on 4 June 2023 will be the key predictable event for the oil market in the nearest future, while the US debt limit problem will further hang like Damocles' sword over the oil market as one of riskier assets until it will be solved. As the deadline now is estimated by the US Treasury as of June 5, the next week seems to be crucial for all risker assets as no decision certainly will result in a one more panic selloff. On the other hand, if the deal will be done in time, there is a high chance of a relief rally on a month-long horizon. So, we believe that the overall risk appetite will be more important driver of crude oil prices in June, comparing to fundamental news, at least if there will be no material surprises from the coming OPEC+ meeting.
Although the price structure of futures on major crude benchmarks, including Brent and WTI, remained in backwardation, the curves flattened significantly in May due to a deteriorating oil demand outlook and renewed concerns about the health of the global economy. So, prompt-month contracts were sold off more severely early in the month comparing to forward-month contracts. Thus, the ICE Brent M1/M3 backwardation narrowed in May by $0.52 to a premium of $0.35 per barrel (as of May 26), while ICE Brent’s M1/M24 backwardation of ICE Brent futures decline by $1.34 to $5.94 per barrel over the same period of time.
Total world oil production declined a little bit in April 2023 in compare to the month prior, softening by 194 thsd bbl / d or -0.2% MoM, in accordance with the data of the US EIA. It was the first monthly decline since the year start. In absolute terms, the volume of the output sank marginally below the level of 101.0 mln bbl / d, but remained above the threshold of 100.0 mln bbl / d for the 10th straight month. In yearly terms, total oil production around the globe still posted a solid gain of 2.37 mln bb/ d by contrast with the level of April 2022, or +2.3% YoY, the 24th month of permanent expansion of the output on an annual basis. According to the IEA, global oil supply went down by 230 thsd bbl / d to 101.1 mln bbl / d in April 2023 as significant outages in Iraq, Nigeria and Brazil were only partly offset by increases elsewhere. And steeper losses are in store for the current month as wildfires shut in Canadian barrels and extra cuts from some OPEC+ producers take effect. The monthly decline of global oil supply in April 2023 was driven by contraction of oil output of both the OPEC and non-OPEC states, though the latter provided the major part of the overall drop.
OPEC’s total crude oil production declined in April 2023 for the second month in a row, contracting by another 217 thsd bbl / d in comparison with the month prior, or -0.8% MoM, and sinking to its 6-month low, according to cartel’s own data. In yearly terms, OPEC’s total output was nearly flat in the month, providing a decline of 75 thsd bbl / d relative to a year ago, or insignificant -0.3% YoY. Nevertheless, it was the worst annual dynamics of the output since the middle of 2021 year. Meanwhile, the IEA assessed OPEC’s total crude oil extraction in April 2023 as equal to 28.85 mln bbl and the EIA evaluated the figure as equal to 28.65 mln bbl / d, which is 247 thsd bbl / d and 47 thsd bbl / d higher than OPEC’s home estimate respectively. The most severe monthly fall of the output among OPEC-participating states was experienced in Iraq, where extraction of crude oil dropped by 235 thsd bbl / d in compare to the level of a month ago, or -5.4% MoM. The production decline came after Turkey halted Iraq's 450 thsd bbl / d of northern exports on March 25,2023 after an arbitration ruling by the International Chamber of Commerce (ICC). In result, Iraq demonstrated the worst monthly dynamics of the output since the summer of 2020 year. However, in relative terms, even more rapid contraction of crude oil production in April 2023 was exhibited in Nigeria. The output crushed in this OPEC’s country by 162 thsd bbl / d by contrast with the month prior, or dramatic -12.1% MoM, after a strike at Exxon Mobil's local units. It was the worst performance of country’s production in monthly terms over more than 3 years.
The majority of non-OPEC oil-producing countries showed negative dynamics of their output in April 2023 by contrast to March 2023, along with performance of the overall figure of the group. The most significant monthly drop of oil production within the month was recorded in Russia, which continued to suffer from tough sanctions imposed by western states and “voluntary” production cuts according to the most recent OPEC+ deal. So, the output continued to shrink in Russia in the course of 2 months in a row and narrowed in April 2023 by another 350 thsd bbl / d, or -3.3% MoM. In result, the volume of country’s total oil supply sank to its lowest level since May 2022 of 10.50 mln bbl / d. However, even more rapid monthly fall of oil production in the month under review was recorded in Canada. Total Canadian output dropped in April 2023 by 3.4% MoM, or -203 thsd bbl / d as compared to the level of March 2023. In result, total oil supply of the country sank to its lowest level since July 2022 of 5.73 mln bbl / d. On the other hand, Brazil and Norway produced much more oil in April 2023 relative to a month ago. In Brazil, the production ramped up by 321 thsd bbl / d as compared to the level of March 2023, or impressive + 8.7% MoM. It was the fastest monthly expansion of the output over recent 2 years, though it was attributed mainly to a seasonal pattern of the production in Brazil. And even more dramatic growth of oil supply was registered in Norway, where the output skyrocketed by 269 thsd bbl / d relative to the month prior, or overwhelming +11.1% MoM. As it was the third consequent month of production expansion in the country, its volume ramped up to its maximum score within more than 10 years of 2.32 mln bbl / d.
Total oil output in the US decreased in April 2023 by 76 thsd bbl / d, but just -0.4% MoM, remaining above the threshold of 21.0 mln bbl / d for the second time in history. The monthly drop of oil production in the US in April 2023 was fueled solely by negative dynamics of conventional crude oil output, while shale oil output in the country continued to grow. Thus, US supply of conventional oil tumbled within the month by 206 thsd bbl / d, or worrying -7.3% MoM, posting its worst monthly performance since September 2021, while supply of shale oil kept on expanding in the US in April 2023 for the 4th straight month and added another 34 thsd bbl / d by contrast with a month ago, or +0.4% MoM. Among shale oil fields, the most substantial monthly rise of the output in April 2023 was observed at Niobrara and Permian deposits.
The IEA revised its forecast for world oil demand growth for 2023 up by the IEA to 2.2 mln bbl / d in its most recent monthly report, as China’s rebound even stronger than previously expected, with the country setting an all-time record in March 2023 at 16 mln bbl / d. The world’s second biggest oil user after the US will account for nearly 60% of global growth in 2023. According to the agency’s estimates, record demand in China, India and the Middle East at the start of the year more than offset lackluster industrial activity and oil use in the OECD. The latter accounts for just 15% of growth this year with its average 2023 expected to increase by 350 thsd bbl / d supported by consumer spending and personal mobility in comparison with 1.9 mln bbl / d in non-OECD gains. Overall, the IEA expects world oil demand to average 102 mln bbl / d in 2023, 1.3 mln bbl / d more than it was in 2019.
Meanwhile, global consumption of crude oil and petroleum products continued to soften in April 2023 for the second month in a row, diminishing by 680 thsd bbl / d comparing to the figure of the previous month, or -0.7% MoM, according to the EIA. However, it continued to fluctuate in a rather tight range of 97.0-101.0 mln bbl / d for almost 2 years, falling in April 2023 below the threshold of 100.0 mln bbl / d for the 5th time in recent 12 months. As for its yearly dynamics, global demand for oil and oil products ramped up in the month under review by 2.05 mln bbl / d, or +2.1% YoY, showing its 26th straight month of non-negative growth. As for major oil-consuming countries, the major cutback of the demand within the month was observed in the US and Japan, which reduced their total consumption of oil by 390 thsd bbl / d by contrast with a level of March 2023, or -1.9% MoM, and by 340 thsd bbl / d, or severe -9.6% MoM, respectively.
Global observed oil inventories declined in March 2023 by 7.9 mln bbl relative to the previous month, according to IEA’s preliminary data, as a surge in oil on water and a slight increase in non-OECD stocks failed to offset a hefty 56 mln bbl decline of the stockpiles in the OECD. Led by a sharp draw in products, total OECD commercial stocks of oil and petroleum products fell to their 6-month low of 2.753 trln bbl, sinking by 89 mln bbl below their five-year average for the corresponding month of a year. Early IEA data on April 2023 show a certain build in on land inventories and a draw in oil on water. As for detailed data on the month prior, total OECD commercial stocks of crude oil and petroleum products barely changed in February 2023 in comparison with January 2023, losing roughly 20 thsd tons, or less than -0.01% MoM. The same time, total OECD commercial stocks of oil declined more significantly in February 2023 on a year-over-year basis, providing a decline of 12.0 mln tons relative the level of February 2022, or -2.4% YoY. In yearly terms, the stocks in the OECD continued to exhaust for the 20th month in a row.
Total US stockpiles of oil and petroleum products contracted marginally in April 2023, losing 3.7 mln bbl comparing to the month prior, or -0.2% MoM. It was only the third month over recent decades when the volume of the inventories was below the threshold 1.6 trln bbl. The monthly decline was attributed solely to further shrinkage of oil stocks in the Strategic Petroleum Reserves (SPR) held by the US government, while total commercial inventories of oil in the country, on the contrary, showed certain growth relative to the previous month. The size of the SPR narrowed in April 2023 by another 8.3 mln bbl by contrast to a month ago, or-2.3% MoM. The volume of the SPR continued to decrease since the summer of 2020 with a cumulative drop of nearly 45% since that level and sank in April 2023 to its new minimal print throughout the whole history of observations of 362.6 mln bbl.
Global offshore inventories of crude oil decreased a little bit in April 2023, losing 2.2 mln bbl comparing to the previous month, or -2.2% MoM, according to Vortexa, the cargo-tracking company. In result, the volume of the stocks moved below the average level for the corresponding month of a year over last 5 years for the first time since the year start.