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  • Writer's pictureArbat Capital

Oil Market Report - October 2023

In October 2023, the crude oil market experienced significant volatility heavily influenced by geopolitical tensions in the Middle East. Starting the month on a bearish note, both Brent and WTI saw sharp declines, with Brent dropping to around $84.0 and WTI descending from to $82.3 on October 5th.


In October 2023, the crude oil market experienced significant volatility heavily influenced by geopolitical tensions in the Middle East. Starting the month on a bearish note, both Brent and WTI saw sharp declines, with Brent dropping to around $84.0 and WTI descending from to $82.3 on October 5th. This downturn occurred despite OPEC+'s decision to maintain its production cuts, pointing to a speculative nature of the most recent upswing in oil prices occurred in September. The strengthening of the US dollar and rising US Treasuries yields probably was a key driver behind the price drop. However, the later part of the month witnessed a dramatic reversal, fueled by escalating geopolitical tensions in Israel. The potential for the large-scale conflict to disrupt Middle Eastern oil supplies, combined with speculation around tightened sanctions on Iranian oil exports, led to a resurgence in prices with Brent grade rebounded to around $90 and WTI rose to $87. However, crude oil prices softened again at the tail of the month driven lower by diplomatic efforts aimed at de-escalating the Middle Eastern conflict led to a softening of prices. Additionally, the U.S. decision to suspend sanctions on Venezuela hinted at potential new oil supplies, further influencing price dynamics. All in all, the ICE Brent front-month future slid down to $88.8 per barrel as of October 27th, losing 3.6% on a monthly basis, while the NYMEX WTI near-month contract delivered even worse decline, going down by $3.7 or 4.1% relative to a month ago to settle at $85.1per barrel.

Despite to the new Israeli-Hamas conflict broken out in October, the oil market managed to avoid another substantial spike in prices in recent weeks, pointing to a continuous weakness, probably linked with an excessive market optimism in several preceding months, when crude oil prices soared by more than 35%. Notwithstanding very tight market fundamentals with the strongest global demand on records in the 4th quarter on the one hand and significant production cuts by OPEC+ in play till the year end on the other hand, market participants still have been preferring to take profit on long positions in crude oil rather than to make new bets on its further growth beyond the threshold of $100 per barrel. From a technical point of view, the oil market surrendered a 3-month upward trend in October, but is going to close the month above the previous major resistance of $87.5-88.0 for the ICE Brent futures (as for October 27th), which is a good sign from further perspectives. So, the forthcoming month of November may become a cornerstone for medium-term dynamics of the oil market as the current formation has potential to turn either into a new wave of growth or a further sliding to the South. Although the Israeli-Hamas conflict will remain at the forefront of market concerns in November, there will be another crucial event for crude oil prices within the month, namely the next OPEC+ semi-annual meeting on November 26th, where the group will be to extend the supply cuts beyond the turn of 2024 or to increase its oil supply. Taking into account arisen geopolitical tensions in the Middle East, we expect another month of volatile consolidation of crude oil price around the levels achieved ($90 per barrel of Brent) till the end of the month, while further market dynamics in December and beyond will depend to a greater degree on OPEC+ decision to extend or not to extend its production adjustments into 2024 as all major agencies (OPEC, IEA and EIA) expected softer global oil demand in the 1st quarter of 2024.

World oil production scaled in September 2023 to an impressive 101.3 mbd, marking a month-over-month augmentation of 0.55 mbd, or 0.5% MoM, according to the most recent monthly report of the U.S. Energy Information Administration (EIA). Such strong momentum hasn't been observed in the past three months, pushing the production to its maximal level over the last three months and, therefore, effectively terminated a two-month downward trajectory. Year-over-year analysis unveils a humble increment of 0.12 mbd, a growth rate of 0.1% YoY. Although this might seem modest, it's paramount to note that this is the acme of year-over-year growth rates observed in the recent two months. When contextualized with a broader historical backdrop, the world oil production in September 2023 surpassed its five-year average for the same month by an appreciable 3.4 mbd, translating to an uptick of 3.5%, and again rose above an upper bound of a 5-year range for the corresponding month. Moreover, the global output was just 1.12 mbd lower as compared to an all-time high of 102.2 mbd, recorded in the turn of 2018.

The International Energy Agency (IEA), in its turn, said in its most recent monthly report that world oil output rose 270 kbd in September 2023 to 101.6 mbd, led by higher production from Nigeria and Kazakhstan. The Israel-Hamas conflict has not had any direct impact on oil flows. The IEA again stressed that, driven by non-OPEC+ growth, global output will increase by 1.5 mbd and 1.7 mbd in 2023 and 2024, respectively, to new record highs. As for the OPEC+ bloc, the supply story this year is one of contraction, although Iran is on course to rank as the world’s second biggest source of growth after the United States. Voluntary cuts are expected to keep the oil market in deficit as OPEC+ could pump 1.3 mbd below the call on its crude in 4Q23. If extra cuts are unwound in January 2024, the balance could shift to surplus, which would go some way to help replenish depleted inventories.

According to cartel’s own data, OPEC total crude oil production continued to grow in September 2023 for the second month in a row, marking a month-over-month (MoM) surge of 47 thousand barrels per day (kbd), which translates to an increase of approximately 0.2% MoM. Nevertheless, the volume of OPEC total output stayed close to the lowest mark over recent 2 years, remaining below the level of 28.0 million barrels per day (mbd) for the third straight time in last 21 months. Comparing to a post-pandemic high of 29.65 mbd, shown in August 2022, cartel’s supply was lower in the reported month in by 2.12 mbd, while relative to a pre-pandemic maximum of 32.0 mbd, recorded in November 2018, the drop was equal to 4.5 mbd. Delving into the annual metrics, the OPEC obviously witnessed a marked decline, with production waning by 1.9 mbd, a 6.4% year-over-year (YoY) contraction. This descent in production, persistent for half a year now, has confirmed a significant narrative shift. Reflecting upon historical benchmarks, the current output lags behind the 5-year September mean by approximately 0.47 mbd, indicating a relative decline of 1.7%. Among all OPEC-participating countries, Saudi Arabia emerges at the forefront with a remarkable growth. In September, the nation amplified its production by 69 kbd, marking a 0.8% month-over-month (MoM) surge. On the other hand, Iran delivered the worst monthly dynamics of crude oil output in September 2023 among all OPEC-participating states. The nation's production shrank by 53 kbd in comparison with the previous month, a decline of 1.7% MoM, marking the most pronounced drop in a staggering 31 months.

Total oil production of nations not-participating in the OPEC showcased resilience in September 2023 with a month-over-month growth of 71 kbd, equating to a marginal increase of 0.1% MoM. However, this tiny MoM growth rate stands out, being the fastest observed in the last two months. Moreover, in terms of absolute production level, September's figure of 68.41 mbd is a new all-time high, though just marginal. From a year-over-year perspective, the production landscape remained particularly robust. The surge of 2.3 mbd represents a growth rate of 3.5% YoY. This positive trajectory isn't isolated to September; non-OPEC countries have been on an upward YoY trend for 29 consecutive months. Obviously, when benchmarked against historical data, September's output was significantly higher than the 5-year average. The production level surpasses the average by 3.9 mbd, marking a notable 6.0% upswing. On the one hand, the United Kingdom led the pack with a remarkable month-over-month increase of 122 kbd in oil production, translating to a brilliant 16.1% MoM growth. This uptick is the most pronounced over the previous 7 months. China closely followed suit, boosting its production by 112 kbd, a 2.2% MoM increment. This growth is unparalleled in the past 7 months as well. Kazakhstan also made its mark in September 2023 with an addition of 85 kbd in oil production, a 4.6% MoM leap, a figure not seen in the last 10 months. On the other hand, Canada's September 2023 performance in oil production has been marked by a decline, shedding 90 kbd MoM, translating to a 1.6% MoM drop, the steepest one in last 5 months. And for Norway, the numbers receded by 207 kbd MoM, a sharp 10.3% MoM drop, resulted in production levels being the most subdued in a 15-month retrospective.

U.S. aggregate oil production reached 22.2 million barrels per day (mbd) in September 2023, marking a subtle ascent of just 14 thousand barrels per day (kbd) or 0.1% on a month-over-month basis and showing its slowest monthly increase over recent 4 months. However, this figure stands as a new all-time high of total oil output in the country as the output continues to grow in September for its 7th straight month. Annually, the surge was much more pronounced, tallying at 1.29 mbd or 6.2% YoY. When juxtaposed against a 5-year September mean, the current data overshoots by a noteworthy 2.87 mbd, encapsulating a relative escalation of 14.9%.

The monthly growth of crude oil production in the US in September 2023 was again driven solely by expansion of shale oil output, which experienced a modest MoM uplift within the month, registering an increment of 54 kbd, amounting to a 0.5% MoM surge. While this might seem like a marginal rise as it was the most subdued MoM growth observed over the recent 2 months, the output climbed up its new all-time high nearly touching the mark of 9.9 mbd. Persistently, shale oil production has been navigating the upward trajectory in the U.S., with the trend prevailing for 5 consecutive months. All major U.S. shale oil fields delivered positive production dynamics in September 2023 relative to the month prior, except for Eagle Ford, though the main increment was again delivered by just two fields, namely Permian and Niobrara. Thus, the Permian deposit experienced a subtle MoM surge in production in September 2023, clocking an uplift of 32 kbd, which translates to 0.5% MoM, while Niobrara reported a more encouraging MoM production growth in the same, signifying an uplift of 10 kbd or 1.3% MoM.

Evidence of demand destruction is appearing with preliminary September 2023 data showing that US gasoline consumption fell to two-decade lows, according to the most recent monthly report of the IEA. Demand destruction has hit emerging markets even harder, as currency effects and the removal of subsidies have amplified the rise in fuel prices. However, growth continues apace in China, India and Brazil, underpinning forecast global oil demand gains for this year at around 2.3 million barrels per day (mb/d), of which China accounts for 77%. Global oil demand growth is set to slow to 0.9 mb/d in 2024 as the post-pandemic rebound runs out of steam while the economic expansion slows and energy efficiency improvements weigh on oil use.

Meantime, in accordance with EIA data, global consumption of crude oil and petroleum products experienced a slight uptick in September 2023 relative to August 2023. The consumption increased by approximately 0.28 mb/d, marking a rise of about +0.3% month-over-month (MoM). On an annual basis, the world demand for oil and oil products grew by roughly 0.95 mb/d compared to September 2022, reflecting a growth of +0.9% year-over-year (YoY). Although the volume of world’s consumption still was below a post-pandemic high of 102.16 mln bbl / d, recorded in June 2023, it climbed above an upper bound of a 5-year range for September. Also, total use of oil around the globe continued to grow in September 2023 for 31 months in a row, as for annual terms.

Global observed oil inventories tumbled by 63.9 million barrels (mb) in August 2023, led by a massive 102.3 mb draw in crude oil stocks, according to the most recent monthly report of the IEA. Preliminary data suggest that on land inventories continued to draw in September, while oil on water rebounded as exports recovered. OECD total commercial stocks of crude oil and petroleum products fell counter-seasonally by 6.5 mb in August to 2 816 mb, a substantial 105.3 mb below their five-year average.

As for detailed IEA data for July 2023, the OECD witnessed an augmentation in total commercial stocks of crude oil and petroleum products, registering monthly increase of 1.69 million tons or 0.4% MoM. The inventories set a local high, outpacing the figures of the previous 2 months and disrupting the downward momentum on a month-over-month basis, which had persisted for 2 preceding months. Also, the July 2023 growth rate was the most robust observed in the past 3 months. However, on the year-over-year trajectory, the inventories marked a reduction, plummeting by 6.25 million tons, amounting to a 1.3% YoY decrease from the same month in the preceding year. In relation to a 5-year average for the same month, the July 2023 inventory levels are notably subdued. They fall short by 54.69 million tons, representing a 10.4% contraction compared to the half-decade mean.

US total inventories of oil and petroleum products swelled in September 2023 by a robust 21.5 mb, marking a 1.3% MoM ascent. However, the annals of time reveal a subtle ebb from yesteryear, with a contraction of 14.4 mb or 0.9% YoY. Intriguingly, this stockpile crescendo reached a zenith unseen in the past seven months, and its growth trajectory outpaced any witnessed in the preceding eight months. Yet, when juxtaposed with the 5-year September median, the cache seemed somewhat depleted, lagging by a significant 270.9 mb or 14.4%. The monthly increase in US total oil inventories was primarily influenced by the dynamics of the country's commercial stocks. Meanwhile, the volume of oil stored in the Strategic Petroleum Reserves (SPR) saw a modest increase. In particular, U.S. commercial oil inventories expanded by 20.5 mb, a month-over-month growth of 1.7%, while the SPR witnessed a modest uptick, registering an increase of approximately 1.1 mb, translating to a 0.3% rise month-over-month.

Oil inventories stationed at Cushing, Oklahoma, showcased a substantial contraction of 7.1 mb or 24.3% MoM. This dynamic accentuates the pronounced ebbs when one considers the annual perspective: there was a contraction of 3.9 mb, signifying a 14.9% YoY dip compared to the same period the previous year. Cushing's trajectory has been unmistakably bearish, with the downward momentum sustaining over the past three months. In result, the inventory level has sunk to their lowest level over the trailing 15 months. Moreover, the pace of this decline has been nothing short of relentless, as evidenced by the fact that the month registered the steepest descent in the last 19 months. Benchmarking the current inventory against the five-year mean for September, the figures are markedly lower by 14.2 mb, which, in relative terms, constitutes a staggering 39.1% shortfall. Moreover, the volume sank below even a lower bound of a 5-year range.

The global offshore oil inventories tallied up to 87.2 million barrels (mb). This figure embodies a modest increment of 0.5 mb from the preceding month, marking a growth of approximately 0.6% MoM.On an annual spectrum, the global offshore oil panorama showcases a more vibrant expansion. The year-over-year metrics depict a commendable addition of 14.9 mb to the inventories, an ascent of 20.6% YoY. The current inventory volume, while not at its zenith, is still notably high. In fact, the offshore oil stocks are at their absolute high over the past two months. Benchmarking against historical data, the September 2023 inventory surpasses its five-year average for the same month. Specifically, the global offshore oil stocks are ahead by a significant 6.8 mb, translating to an 8.5% lead over this historical average. As for regional contribution to the overall monthly dynamics, Asia significantly boosted its offshore oil inventories of around 17% MoM, while the Middle East Gulf stocks surged by 29.3% MoM. In contrast, Europe faced a sharp exhaustion of 36.9% MoM, and the North Sea experienced a complete depletion, impacting the overall global dynamics. The US Gulf Coast and West Africa also observed contractions, albeit to a lesser degree.

AC - Oil Market Report - Oct-2023
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