As the crude oil market is experiencing its largest 90-day decline since March-April 2020, which was only exceeded prior to 2020 by market routs in 2014-15 and 2008-09, we see the limited downside in crude oil prices from the levels achieved and believe that the market would pass its trough before the winter starts.
EXECUTIVE SUMMARY
As the crude oil market is experiencing its largest 90-day decline since March-April 2020, which was only exceeded prior to 2020 by market routs in 2014-15 and 2008-09, we see the limited downside in crude oil prices from the levels achieved and believe that the market would pass its trough before the winter starts as the fundamentals remains rather tight and only would get tighter in a couple of quarters ahead. On the demand side, both the OPEC and the IEA expected a rather robust growth of the global oil consumption in 2023, driven mainly by jet fuel and robust oil use for power generation in the Middle East and in Europe due to record natural gas and electricity prices. In addition, petroleum product markets, especially diesel, are expected to remain in deficit in coming quarters due to downstream capacity constraints outside of China as lower Chinese export quotas have sharply reduced its sales abroad and newly introduced taxes in India have discouraged exports from Asia’s largest supplier. Moreover, the economic outlook in the developed world would pass through its worst point within next two months, as after Fed’s and ECB’s anticipated decisions to raise their key rates in September-November of 2022 the most part of the expected monetary tightening in the US and the EU will, probably, occur. The same time, deep and prolonged recession in both regions is still considered as the pessimistic case. On the supply side, total spare capacities of major oil-producing countries remains restrained with no obvious additional sources of growth, except for lifting bans on exports from sanctioned states, such as Iran, Russia and Venezuela. However, it looks less and less probable with oil prices declining, while some OPEC-participating states struggled to intensify their output to the proposed levels, totaling a 1.4 mln bbl / d drawback. In such circumstances, the expiration of crude oil sales from the SPR in the US in October 2022 combined with still low crude and products stocks in OECD countries would shift oil fundamentals to a tighter supply/demand balance. Moreover, the EU embargo on Russian crude oil and product imports that comes into effect in December 2022 and February 2023, respectively, is expected to result in an additional 1 mln bbl / d of products and 1.4 mln bbl / d of crude oil cuts of Russia’s energy exports. And it’s questionable whether Russia will be able to again re-route these additional volumes of exports to other countries successfully. According to the IEA, Russian total oil production is forecast to decline to 9.5 mln bbl / d by February 2023, a 1.9 mln bbl / d drop compared to February 2022. However, we don’t exclude a short-term swing of ICE Brent front-month contract to $75-80 / bbl area if it fails to hold above the support of $90 / bbl, which is both the lower bound of the upward channel and 38.2% retracement from March 2020-March 2022 rally.
Despite to a substantial fall of the US equity market with S&P 500 index sliding down by more than 8%, the bulk of US energy equities showed a very firm performance over last 4 weeks with US Energy Sector ETF (XLE) losing just 1.1% and US Oil & Gas Exploration & Production ETF (XOP) declining by 3.6% over the period. More interestingly, 12-month strip prices of related commodities also exhibited a much more pronounced drop since August 19, 2022, equal to 6.6%, 13.0% and 21.3% for WTI crude oil, Henry Hub natural gas and 321 crack spread over WTI, respectively. As we see a certain risks of further turmoil on the crude oil market if ICE Brent benchmark fails to hold above the support of $90 / bbl and taking into consideration solid outperformance of US energy equities over recent two months, resulting in US oil producers began to look relative overvalued to oil prices, we recommend to close the long arm of our synthetic neutral market pose and hold only the naked short position in Energy Sector ETF (XLE). However, we also advise to restore long positions in US E&Ps with strong fundamentals and/or additional growth drivers such as Pioneer Natural Resources (PXD), Ovintiv Inc (OVV), EQT Corporation (EQT), Hess Corp (HES), ConocoPhillips (COP) and Diamondback Energy (FANG) in case crude oil prices will ease below $80.0 / bbl on ICE Brent front-month contract.
Although crude oil market fundamentals remained relatively healthy with the prospect of robust global oil demand growth for 2022 and 2023 by major forecasting agencies, crude oil prices extended their declines in August 2022. The prices fell to about 6-month lows, primarily driven by a heavy selloff in futures markets amid rising market volatility and lower market liquidity that was reflected in a further decline in total open interests in the two major futures contracts ICE Brent and MYMEX WTI. Market sentiment was dominated by worries related to slowing global economic and oil demand growth while tightening monetary policies added downward pressure.
Sentiment deteriorated further following the release of additional lackluster economic data. Official data from China showed weaker-than-expected retail sales and industrial production in July 2022, and China's central bank announced a surprise cut in key interest rates in response to weak economic data. Moreover, slower than anticipated manufacturing activity in China added to the mixed economic data in the US and Europe, which weighed on the oil demand outlook. Moreover, China's refinery crude runs fell in July 2022 to the lowest level in over two years amid a lack of export quotas for products and surging COVID-19 cases, while China's crude oil imports from the international market remained low in July. Investors also eyed declining gasoline refining margins along with weak seasonal implied gasoline demand in the US as the summer driving season comes to an end. From the supply side, worries about a tight supply outlook eased after the return of Libya's crude production and sustained crude supply from the SPR, while traders in futures markets were anticipating higher crude production in some regions. This was reflected in flattening futures forward curves of major crude benchmarks.
However, the prospect of healthy global oil demand growth in 2022 and the upward revisions of global oil demand growth for 2022 from several forecasting agencies contributed to easing concerns about the market perception of weakening global oil demand during the second half of August 2022. Forecasters bet on higher use of oil in power generation, industrial usage and refineries amid soaring gas and electricity prices, specifically in Europe. Moreover, the EIA weekly report showed a larger drop in commercial US crude oil stocks in the middle of the month, which was driven primarily by a surge in US crude exports, which hit a record of 5 mln bbl / d. This also helped to offset concerns about the weakening demand outlook and limited price declines.
Notwithstanding some relief, witnessed later in the month, the ICE Brent front-month contract declined by $7.38 in August 2022 on a monthly average basis, or -7.0% MoM, to settle at $97.74 / bbl, and the NYMEX WTI fell by $7.90 on the same basis, or -7.9% MoM, to settle at $91.48 / bbl. However, as for cumulative performance since the year start, the ICE Brent generic active +contract was $36.92, or 55.0%, higher at $104.00 / bbl, comparing to the same period of 2021, while the NYMEX WTI generic front-month contract was higher by $35.83, or 55.8%, compared with the same period, a year earlier.
In early September 2022, the crude oil market continued to drift lower with both ICE Brent and NYMEX WTI futures sinking to fresh 7-month lows of $87.40 / bbl and $81.20 / bbl, respectively, on September 8, 2022, their minimal prints since January 2022. Relative to the year highs, posted on March 7, 2022, both benchmarks lost more than 37%. The market was pushed lower on intensified fears that hefty interest rate increases will curb global economic growth and demand for fuel, as well as was hurt by the U.S. dollar's strong run, which makes oil more expensive for buyers using other currencies as the dollar index was up for its 4th week in recent 5 weeks. European Central Bank's unprecedented rate hike of 75 basis points on September 8, 2022 and more COVID-19 lockdowns in China have also weighed heavily on prices.
Nevertheless, crude oil prices made an attempt to rebound later in the month as the potential for more supply disruptions from Russia remained a risk, while new China’s economic data suggested stimulus measures there were having some success ramping up demand. The upward move was also supported by forthcoming expiration of crude oil sales from the U.S. Strategic Petroleum Reserve (SPR), as the U.S. Department Of Energy official said the White House was not considering new releases from the SPR at this time beyond the 180 million barrels that President Joe Biden announced months ago. However, the gains were limited as both the IMF and the World Bank warned that the global economy could tip into recession next year, another bad news for the demand side of the oil coin, come just a day after the IEA forecasted almost zero growth in global oil demand in the 4th quarter of 2022, owing to a weaker demand outlook in China.
As a result, both the ICE Brent and the NYMEX WTI front-month contracts again ended the period under report in the red zone, for the third and the fourth straight month, respectively, though the losses were less severe than in the month prior. The ICE Brent active contract fell further by nearly $4.50 by contrast with the level of August 19, 2022, or -4.6%, to settle at $92.23 / bbl as of September 20, 2022. The NYMEX WTI near-month contract descended by $5.32 in comparison with the level of August 19, 2022, or -5.9%, and ended the period under report at $85.45 / bbl.
OPEC’s total crude oil production continued to grow in August 2022 for the 16th straight month and enlarged further by 590 thsd bbl / d in compare to the month prior, or +2.0% MoM, the fastest monthly expansion of the output throughout recent 14 months. In result, the volume of OPEC’s total crude oil output reached in August 2022 its new maximal level since April 2020 of 29.64 mln bbl / d. The most impressive monthly increase of crude oil production in the month under review was demonstrated in Libya, which managed to restore its crude oil extraction and its exports to normal levels as the government has persuaded militias to reopen several oil fields and exporting ports. So, the output in Libya skyrocketed in August 2022 by as much as 380 thsd bbl / d comparing to July 2022, or dramatic +54.3% MoM. Notwithstanding the solid monthly growth of the output within the month, the OPEC still has lagged the conformed schedule of its production cuts adjustment, as OPEC+ agreed to expand its output by as much as 648 thsd bbl / d for the month of August 2022 to evaporated the pandemic cuts completely and restored the output back to the level of October 2018. However, according to OPEC’s own calculations, the volume of the production in August 2022 was nearly 1.4 mln bbl / d lower than it was in the reference month. As for annual dynamics, OPEC’s total crude oil output obviously showed a more considerable growth in August 2022, comparing to the monthly basis, along with preceding months. Thus, the total production of the cartel broadened in August 2022 by 2.51 mln bbl / d relative to the level of August 2021, or +9.3% YoY, the 16th consequent month of annual expansion.
After unexpected decision of the OPEC+ to enlarge its total output by symbolic 100 thsd bbl / d in September 2022, the group decided to revert to the production level of August 2022 for OPEC and non-OPEC Participating Countries for the month of October 2022 as per the attached table, noting that the upward adjustment of 100 thsd bbl / d to the production level was only intended for the month of September 2022. Also, the 32nd OPEC and non-OPEC Ministerial Meeting, which was held on September 5, 2022, noted the adverse impact of volatility and the decline in liquidity on the current oil market and the need to support the market’s stability and its efficient functioning. The Meeting noted that higher volatility and increased uncertainties require the continuous assessment of market conditions and a readiness to make immediate adjustments to production in different forms, if needed, and that OPEC+ has the commitment, the flexibility, and the means within the existing mechanisms of the Declaration of Cooperation to deal with these challenges and provide guidance to the market. So, the Meeting decided to request the Chairman to consider calling for an OPEC and non-OPEC Ministerial Meeting anytime to address market developments, if necessary. The next 33rd OPEC+ meeting was scheduled for October 5, 2022.
Total oil production around the globe continued to grow in August 2022 for the 4th straight month and enlarged further by 926 thsd bbl / d relative to the level of the previous month, or +0.9% MoM. Comparing to the local low of April 2022, total oil output worldwide expanded in August 2022 by 2.66 mln bbl / d. Moreover, the volume of the global oil supply expanded within the month to more than 101.0 mln bbl / d and, therefore, finally outnumbered the levels of the first quarter of 2020 year. Before August 2022, more oil was produced in the world only twice in history: in the 4th quarter of 2019 year and in the 4th quarter of 2018 year. In such circumstances, obviously that total oil production around the world again was considerably higher in the month under review than it was a year ago. Thus, the output widened in August 2022 by 4.74 mln bbl / d in contrast by the level of August 2021, or +4.9% YoY, the 17th month of global supply yearly expansion in a row. Relative to the pandemic trough, recorded in May 2020, total production of oil worldwide increased in August 2022 by as much as 13.12 mln bbl / d, or impressive +14.9%. The strongest monthly growth of extraction of oil in August 2022 among non-OPEC states was observed in Norway, where the production skyrocketed by 188 thsd bbl / d in compare to the level of July 2022, or impressive +10.0% MoM. It was the second month of dramatic improvement of oil production in Norway in a row, though, to a certain degree, it was attributed to the seasonal pattern of production in the country. The second largest monthly expansion of the output among non-OPEC states in August 2022 was recorded in the US. Thus, the production of oil increased in the country in the month under review by 153 thsd bbl / d relative to the previous months, or +0.8% MoM, and ran to its new maximum volume of 20.43 mln bbl / d since the start of 2020 year. On the other hand, the most severe monthly fall of oil extraction in the month under review among all non-OPEC states was recorded in other ex-USSR states, mainly in Kazakhstan, due to continued problems with oil exports. Thus, in the middle of August 2022, the Caspian Pipeline Consortium (CPC) has suspended oil loadings from two of three single mooring points (SPM) at its Black Sea terminal Yuzhnaya Ozereyevka for repair due to equipment damaged by bad weather. In result, the combined oil output of other ex-USSR states tumbled in August 2022 by 345 thsd bbl / d relative to the level of July 2022, or dramatic -12.2% MoM. The second largest monthly decline of oil production in August 2022 was observed in Russia, which had managed to restore its oil output nearly completely to the levels of the 1st quarter of 2022, despite to tough sanctions on its energy exports. Nevertheless, in August 2022, the oil output in Russia declined by 125 thsd bbl / d relative to the local high of July 2022, or -1.1% MoM.
According to the weekly US DOE data, US primary domestic oil production, counted as the sum of crude oil and NGLs production, expanded in August 2022 by 95 thsd bbl / d relative to July 2022, or +0.5% MoM. The primary production continued to grow for the 4th straight month and finally reached in August 2022 its highest level on records, slightly above 18.0 mln bbl / d. However, the expansion of the primary oil production in the US in August 2022 was somewhat lower than the growth of the overall oil supply in the country, equal to 153 thsd bbl / d in accordance with the monthly data of the US DOE. From a yearly performance standpoint, US primary domestic production of oil definitely experienced a much more profound expansion in August 2022, along with preceding months. To be more precise, the production enlarged by 1.15 mln bbl / d in compare to the one year ago level, or +6.8% YoY, a further deceleration relative to the prior months. As for yearly dynamics, the primary output continued building up in the US within 16 months in a row.
US total shale oil production continued to climbed up in August 2022 for the 4th straight month, along with the overall oil output in the country, and increased further by 312 thsd bbl / d as against with the level of July 2022, or +3.4% MoM. In result of a 4-months-long spurt the volume of the output rose in August 2022 to its record high over the whole history of observations, equal to 9.44 mln bbl / d. Meanwhile, in annual terms, the output of shale oil in the US again exhibited a very strong performance in August 2022, along with preceding months. The production increased in the month under consideration by 1.07 mln bbl / d by contrast to the level of a year ago, or +12.8% YoY, a certain deceleration relative a month ago. As for yearly dynamics, the production of shale oil in the US kept on growing in August 2022 for 16 consequent months. All major shale oil deposits in the US showed a rise of their production in the month under review by comparison with the month prior, except for Anadarko. The most significant monthly expansion of shale oil output in August 2022 was registered on the field of Permian. The production on the deposit widened during the month by 259 thsd bbl / d by contrast to the level of July 2022, or solid +4.8% MoM. It was the 6th consequent month of expansion of the output on Permian field and the most rapid monthly growth of the output for more than a year. In result, the volume of the output on Permian deposit increased in August 2022 to its new maximum volume of 5.68 mln bbl / d throughout the whole history of observations.
Global consumption of crude oil and petroleum products continued to soften during the 2nd quarter of 2022 for the second quarter in row and diminished further by 940 thsd bbl / d comparing to the figure of the 1st quarter of 2022, or -0.9% QoQ, according to the most recent data from the IEA. In result, the volume of the global demand shrank to its lowest level over a year of 98.5 mln bbl / d. And if the drop of the consumption in the 1st quarter of 2022 was to a certain degree attributed to the seasonal pattern, the softer demand in the quarter under review was fueled by record high oil prices and further pandemic-related lockdowns in China. From a yearly dynamics point of view, total consumption of crude oil and oil products around the globe in the 2nd quarter of 2022 still was considerably higher than in the 2nd quarter of 2021. The annual growth of the total consumption was equal to 2.15 mln bbl / d, or +2.2% YoY. Although it was the 5th consecutive quarter of stronger demand in yearly terms, the speed of its expansion decelerated to the lowest level over the period.
Under the most recent IEA monthly report, growth in global oil demand continues to decelerate, weighed down by renewed Chinese lockdowns and an ongoing slowdown in the OECD. This is partly offset by large-scale switching from gas to oil, estimated to average 700 thsd bbl / d during 4Q22 and 1Q23, double the level of a year ago. World oil demand is forecast to rise by 2.0 mln bbl / d in 2022 and 2.1 mln bbl / d in 2023, marginally lower than in the previous IEA monthly report.
OECD total commercial stocks of crude oil and petroleum products continued to widen in June 2022 for the 4th straight month and increased by another 6.2 mln bbl in contrast with the level of May 2022, or +0.2% MoM. Despite to the 4-month long positive monthly dynamics, the volume of the inventories still remained in June 2022 below both the average and the minimal levels for the corresponding month of a year over last 5 years. On an annual basis, OECD total commercial stocks of crude oil and petroleum products again exhibited strongly negative performance in June 2022, along with several preceding months. The volume of the stockpiles tumbled in the month under review by 194.2 mln bbl in compare to the level of a year ago, or -6.8% YoY, a certain deceleration of contraction, comparing to the previous month.
According the preliminary IEA assessments, global observed inventories of crude oil and petroleum products fell by 25.6 mln bbl in July 2022 on a drawdown in crude stocks in China and oil on the water as well as from IEA government stocks. OECD total industry stocks rose by 43.1 mln bbl to 2.705 bn bbl, narrowing the deficit versus the five-year average to 274.9 mln bbl. IEA member countries released nearly 180 mln bbl of public stocks from March 2022 through August 2022, with over 50 mln bbl to be delivered through October 2022.
Total stockpiles of crude oil and petroleum products declined in the US in August 2022 after two straight months of expansion. The monthly drop was equal to 16.6 mln bbl, as compared to the level of July 2022, or -2.2% MoM. In result, the volume of the total stocks again sank close to the multi-year low of 740 mln bbl, recorded in May 2022, therefore, remaining well below the lower bound of the range for the corresponding month of a year for recent 5 years. In yearly terms, total inventories of crude oil and petroleum products in the US also demonstrated a significant deterioration in August 2022, along with preceding months, and tumbled by 44.8 mln bbl, or -5.7% YoY. Nevertheless, the speed of annual decline of the stocks continued decelerating, though not materially this time. On an annual basis, the inventories in the US kept on exhausting for 17 straight months. The monthly drop of the overall oil inventories in the US in August 2022 was fueled by shrinkage of both crude oil and petroleum products stockpiles, with each component delivered nearly the same decline in absolute terms.
The stocks of crude oil in the Cushing storage in Oklahoma (the basis for NYMEX WTI futures) continued to expand in August 2022 for the 2nd straight month and enlarged by 0.8 mln bbl comparing to the level of July 2022, or +3.3% MoM, though the monthly dynamic of the overall crude oil inventories in the US was strongly negative within the month. However, it was a common situation during many preceding months, conversely to the pattern observed in July 2022. As it was the second consequent monthly expansion of the inventories, the volume of the stocks remained slightly above the lower border of the range for the corresponding month of a year over last 5 years. In yearly terms, the crude oil inventories in Cushing again delivered a strong negative performance in August 2022, along with previous months. This time, the stockpiles tumbled in the month under review by 9.2 mln bbl relative to the level of the same month of the year prior, or still dramatic -26.7% YoY. It was the 17th month in a row of depletion of crude oil inventories in Cushing on an annual basis.
According to the revised data, in August 2022, global offshore inventories of crude oil experienced a decrease of 5.3% MoM, or -4.8 mln bbl in contrast to the level of July 2022. The stocks continued to decline for consequent 2 months, but still remained slightly above the average level for the corresponding month of a year over last 5 years, as the negative dynamics of the figure in July and August was attributed to the seasonal pattern. In yearly terms, the volume of the total floating stockpiles of crude oil around the globe also diminished in August 2022. As compared to the level of a year ago, it decreased by 14.1 mln bbl, or -13.9% YoY. From a yearly performance standpoint, the total stocks proceeded to slid down throughout the second consequent month. The majority of regions in the Vortexa dataset showed a decline of volumes of crude oil that was held offshore in August 2022 as contrasted with the levels of July 2022, along with the overall figure. The most formidable monthly decline of floating inventories of crude oil in the month under review was recorded in the Middle East Gulf. The stockpiles shrank by 6.4 mln bbl in comparison with the previous month, when their volume rose to a new maximum print throughout recent 5 years, or dramatic -47.9% MoM.