top of page
Search
  • Writer's pictureArbat Capital

Oil Market Report - September 2023

In September 2023, crude oil prices continued their growth and rose to new multi-month highs of above $97 and $94 per barrel of Brent and WTI grades, respectively, going to their 4th straight monthly increase (as of September 27) with a combine gain of more than 35% relative to the lows observed in May-June 2023.


EXECUTIVE SUMMARY


IIn September 2023, crude oil prices continued their growth and rose to new multi-month highs of above $97 and $94 per barrel of Brent and WTI grades, respectively, going to their 4th straight monthly increase (as of September 27) with a combine gain of more than 35% relative to the lows observed in May-June 2023. The rally was buoyed by another extension of supply cuts by major OPEC+ nations of Saudi Arabia and Russia till the end of the current year, announced on September 5, and more expectations of robust global demand for oil in the fourth quarter of 2023 and further in 2024 as both the OPEC and the IEA confirmed their previous strong demand forecasts in monthly reports issued in the middle of the month. After another prolongation of Saudi Arabia’s and Russia’s voluntary supply cuts, it is expected that a very tight situation with total oil supply will persist and there again will be a deficit on the global oil market in the final quarter of 2023, which will lead to further global inventories drawdown. Thus, Bloomberg expects a shortfall of 1.1 mln bbl / d in the final three months of 2023, narrowing from the 1.3 mln bbl / d deficit seen in the third quarter. Although market participants took an attempt to take profit and cool down the market in the last decade of the month, the end of the quarter was marked by another upward swing in prices to new year-to-date highs. So, all major crude oil benchmarks ended September 2023 again deep in the green zone. As of September 27, the ICE Brent front-month future (December) rose to $94.36 per barrel, adding 8.7% on a monthly basis, while the expiring November contract surged beyond $97 as well as prompt Brent prices. And the NYMEX WTI near-month contract (still November) showed more prominent monthly performance, adding about 12% to the level of the end of August 2023 to settle at $93.68 per barrel. However, the following December NYMEX WTI contract also was traded materially lower as of September 27, gaining just 9.2% as against with the August 2023 close.

From a technical point of view, in September 2023, the oil market finally breached through the major resistance of $87.5-88.0 as for the ICE Brent futures and, therefore, confirmed its strong upward momentum once again. Notwithstanding a certain weakness witnessed on the market in the late of the month, the market remained in the growing formation with possibilities to achieve a new multi-month high of $100 or even higher on the horizon of several weeks. It’s worthwhile to note here that last time when crude oil was priced with a triple-digit quote was September 2022. Although some market participants expect crude oil prices to go far beyond $100 per barrel in forthcoming months, we are more cautious in our forecasts and see the prices to remain mainly double-digit during the fourth quarter of this year, although there, certainly, will be several attempts or even short swings to the triple-digit zone. The main reason behind our relative skepticism is very limited abilities of major OPEC+ countries to deliver additional substantial output reductions due to potential budget issues. Moreover, the current level of oil prices is more than comfortable for major OPEC+ producers, even taking into account “price ceiling” introduced for Russian oil exports. That’s why we believe that only new supply disruptions due to geopolitics or linked with the nature reasons will be able to push crude oil prices significantly higher in October and the following months of 2023. As for the demand side, we see all the good news is on the table already with all three major data providers for the oil market (the OPEC, the IEA and the EIA) have confirmed their forecasts of record global oil demand during the coming quarter and the following year as well. However, we admit that the demand-supply balance on the oil market will remain very tight in the short-run, giving very strong support for crude prices. Nevertheless, it shouldn’t be forgotten that the oil market ignored in September 2023 such a headwind as strong U.S. dollar, which soared in September to its highest level since November 2022 with the US Dollar Index (DXY) breached above the level of 106.0, comparing to 99.91 in early July this year. So, we believe that trees don’t grow to the sky and expect crude oil to be traded in October 2023 somewhat below the threshold of $100, although above the major support, which is now located at the level of about $88 per barrel of ICE Brent (the previous resistance).

According to the most recent monthly report of the US EIA, total oil production around the globe continued to soften in August 2023 for the second month in a row, shrinking by another 0.48 mln bbl / d relative to July 2023, or -0.5% MoM. Nevertheless, the volume of the output remained well above an average level for the corresponding month of a year for the 7th straight month. The monthly decline of global oil supply in August 2023 was driven by softening of the output both within the OPEC and outside the cartel, though the main cutback was recorded in OPEC total output. The same time, in August 2023, global oil supply also showed negative dynamics on an annual basis, contracting for the first time over last 28 months. However, the decline was minor. Relative to the level of August 2022, the output diminished by just 0.12 mln bbl / d, or -0.1% YoY.

As for cartel’s own data, OPEC total crude oil production improved somewhat in August 2023 after a sharp drop during the month prior, expanding by 113 thsd bbl / d comparing to the level of July 2023, or +0.4% 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 mln bbl / d for the second straight time in last 20 months. No surprise, the OPEC again delivered dramatic contraction of its crude oil supply in the month under review in yearly terms. As compared to the level of a year ago, cartel’s total output dropped in August by 2.2 mln bbl / d, or -7.4% YoY, expressing its new worst annual performance since April 2021 and the 5th consecutive month of decline on an annual basis as well. Meantime, the IEA and the EIA provided quite different evaluations of OPEC’s crude oil supply in the month under review. If the IEA estimated OPEC total crude oil production in August 2023 as equal to 27.96 mln bbl / d which is 0.51 mln bbl / d higher than cartel’s own assessment, then the EIA, contrarily, gave a much lower number of 27.03 mln bbl / d which is 0.42 mln bbl / d less than OPEC’s one. As for EIA’s data, the larger half of OPEC-participating countries delivered positive dynamics of crude oil output in August 2023 comparing to July 2023, though the major part of the overall growth was attributed to just two states, namely Iran and Nigeria. Thus, Iranian output expanded in August 2023 by 143 thsd bbl / d, or +5.0% MoM, and rose to its record high of 3.0 mln bbl / d in the course of preceding 3 years. And Nigerian supply of crude oil demonstrated a rise of 98 thsd bbl / d within the same month, or +8.4% MoM.

Total oil supply of non-OPEC countries softened marginally in August 2023 relative to a month ago, shrinking by a humble amount of 70 thsd bbl / d, or -0.1% MoM, at least pursuant to the data provided by the EIA. The better half of non-OPEC oil-producing states delivered negative production dynamics in August 2023 relative to the previous month, though the main cutback was attributed to a fall of the output in just three of them, namely the UK, Kazakhstan and Russia. The most rapid monthly fall of oil output in relative terms was showed in the UK, where it tumbled by 80 thsd bbl / d comparing to the previous month, or -9.2% MoM. UK total oil supply proceeded to drop at a high pace for the second consequent month, resulted in a fall of the supply to its 11-month low. Kazakhstan likewise showed a fast reduction of its oil output in August 2023 in monthly terms due to power disruptions in the west of the country. To be more precise, Kazakh oil supply fell in August 2023 by 110 thsd bbl / d relative to a month ago, or -5.7% MoM, also expressing declining oil output throughout 2 months in a row. In result, the volume of oil output in the country sank to a 10-month low. Russia also experienced tangible decline of its oil output in the month of August 2023 on a monthly basis. The Russian output went down by 0.7% MoM, or -70 thsd bbl / d as against with the month prior, according to EIA’s data, falling to its lowest level since April 2022.

US total oil supply stopped to grow in August 2023 for the first time in 6 months, though the decline was marginal. Relative to the revised figure of July 2023, the output decreased by just 16 thsd bbl / d, or insignificant -0.1% MoM. The EIA revised significantly upward its initial estimate of country’s total oil production in July 2023 of 21.63 mln bbl / d to 22.0 mln bbl / d. So, in August 2023, the volume of the output also was above that level, for the second time in history. Flat monthly dynamics of US total oil production in August 2023 was a result of softening output of NGLs, renewable fuel and processing gain on the one hand and growing supply of crude oil on the other hand. Thus, production of NGLs diminished in the US in August 2023 by 24 thsd bbl / d, or -0.4% MoM, showing its first monthly decline over last 8 months. Despite a certain monthly contraction, the volume of US NGLs production remained very close to its all-time high above 6.5 mln bbl / d, recorded in the month prior. And US output of crude oil grew in August 2023 by 64 thsd bbl / d in comparison with the preceding month, or +0.5% MoM, providing its third straight monthly gain and rising to the highest level over last 3 years of 12.91 mln bbl / d.

The monthly growth of crude oil production in the US in August 2023 was again caused by expansion of both conventional crude oil and shale oil output. In absolute terms, the major monthly gain was provided by shale oil production, which increased by 41 thsd bbl / d as against with the previous month, or +0.4% MoM, showing its 8th straight month of positive or flat monthly dynamics. In result, the volume of US shale oil supply climbed up in August 2023 to its new all-time high of 9.76 mln bbl / d. The same time, production of conventional crude oil in the US showed more rapid monthly expansion in the month under review in relative terms, adding 23 thsd bbl / d in comparison with the level of July 2023, or +0.7% MoM, and growing for the third month in a row.

According to the most recent monthly report of the IEA, world oil demand remains on track to grow by 2.2 mln bbl / d in 2023 to 101.8 mln bbl / d, led by resurgent Chinese consumption, jet fuel and petrochemical feedstocks. Despite its difficult economic situation, China looks to account for 75% of the increase in world oil demand this year, or 1.6 mln bbl / d. So, an expected rise in global oil demand of 1.5 mln bbl / d in 2H23 over 1H23 levels will eclipse supply by 1.24 mln bbl / d. But global demand growth is set to slow sharply to around 1 mln bbl / d in 2024 as the recovery runs out of steam and with efficiency gains, EV penetration and working from home further suppressing consumption. In 2024, naphtha and LPG/ethane, especially in China, will dominate an overall increase of a more modest 990 thsd bbl / d, to 102.8 mln bbl / d.

The same time, in accordance with EIA data, global consumption of oil and petroleum products barely changed in August 2023 relative to July 2023, increasing by 0.2 mln bbl / d, or +0.2% MoM. Although the volume of the consumption during the month remained somewhat below its post-pandemic high of 102.16 mln bbl / d, recorded in June 2023, nevertheless, it stayed rather close to an upper bound of its 5-year range for this month of a year. On a year-over-year basis, world demand for oil and oil products exhibited more solid growth in August 2023, improving by 0.8 mln bbl / d relative to a year ago, or +0.8% YoY. So, total use of oil around the globe continued to increase in yearly terms for 30 months in a row, although the pace of expansion geared down in August 2023 to its minimal print over last 8 months.

According to preliminary IEA data, global observed oil inventories plummeted by 76.3 mln bbl to a 13-month low in August 2023, led by a hefty decline in oil on water. Non-OECD oil stocks fell by 20.8 mln bbl with the largest draw seen in China, while OECD inventories eased by 3.2 mln bbl within the month. In July 2023, OECD total commercial stocks of crude oil and petroleum products rose by 26.7 mln bbl to 2.814 bn bbl but remained 102.6 mln bbl below their 5-year average.

Detailed IEA data for June 2023 suggests that OECD total commercial stocks of crude oil and petroleum products continued to fall within the month for the second month in a row, losing another 4.13 mln tons by contrast to the level of May 2023, or -0.9% MoM. The volume of the stocks remained below the level of 480 mln tons for 13 consecutive months and, therefore, again was in June 2023 well below both an average and a lower bound of a range for the corresponding month of a year over recent 5 years. Moreover, the stockpiles nearly slid down back to their lowest level over a decade. In yearly terms, OECD total commercial oil inventories also declined in June 2023, keeping on to shrink for 28 months in a row. The stocks went down by 6.14 mln tons relative to the same month of the previous year, or -1.3% YoY, again gearing down to the slowest pace of annual decline for more than 2 years.

US total inventories of oil and petroleum products declined in August 2023 by 14.8 mln bbl in compare to the month prior, or -0.9% MoM, after three consecutive months of expansion. But, in fact, the stockpiles continued to drift sideways in a tight range of 1.59-1.64 bn bbl for the 12th straight month. The drop of US total oil stockpiles in the month under review was caused purely by negative monthly dynamics of country’s commercial stocks, while the volume of oil stored in the Strategic Petroleum Reserves (SPR), on the contrary, moved marginally higher. Thus, US commercial inventories of oil and refined oil products decreased in August 2023 for the first time in recent 5 months, depleting by 17.4 mln bbl in compare to a month ago, or -1.4% MoM, and, therefore, remaining well below its 5-year average for this month of a year. In turn, US government-held oil inventories widened in August 2023 by a small amount of 2.6 mln bbl as against with the level of July 2023, or +2.6% MoM, posting their second straight monthly gain as the figure of the previous month was revised moderately up.

The volume of crude oil held in the storage of Cushing (Oklahoma) continued to go down rapidly in August 2023 for the second straight month and tumbled by another 5.32 mln bbl relative to the level of the previous month, or -15.4% MoM. In result of dramatic depletion during two months in a row, the inventories in Cushing dropped below the level of 30.0 mln bbl, sinking to their new lowest mark since the end of 2022 and remaining well below their 5-year average for the corresponding month of a year. However, the volume of the stocks still was higher in August 2023 than it was a year ago, expanding by 3.88 mln bbl relative to the level of August 2022, or +15.3% YoY.

Global offshore inventories of crude oil tumbled significantly in August 2023 after consequent three months of expansion, according to Vortexa, the cargo-tracking company. Relative to the level of the month prior, the drop was equal to 28.5 mln bbl, or severe -25.2% MoM.It was the steepest monthly depletion of the inventories for almost 5 years. Notwithstanding so dramatic monthly change of the stocks, they deepened not far away from their 5-year average for this month of a year as, to a certain extent, this movement was attributed to a seasonal pattern. The dramatic monthly drop of the overall global inventories was driven by strong depletion of the stocks in only three regions in Vortexa dataset, namely Asia, Europe and the Middle East Gulf. Meantime, total offshore inventories of crude oil around the globe still delivered a profound expansion in August 2023 on a year-over-year basis, adding 17.7 mln bbl to the level of August 2022, or +26.4% YoY. The stocks kept on growing in yearly terms for the 6th months in a row, though the pace of expansion decelerated substantially comparing to the previous month.

AC - Oil Market Report - Sep-2023
.pdf
Download PDF • 1.22MB

Comments


bottom of page