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Global oil demand returns to growth trajectory

Record global petroleum consumption is on the cards for 2024, according to the U.S. Energy Information Administration’s first forecast for this year.

In its latest Short-Term Energy Outlook (STEO), the EIA forecasts that global liquid fuel consumption will exceed 100 million barrels per day (bpd), on average, in 2023 for the first time since 2019, and will then average more than 102 million bpd in 2024.

The predictions hinge on the EIA’s assumption that crude oil prices will decrease through 2023 and 2024. This is down to a forecast increase in petroleum consumption being offset by continued growth in crude oil production in the US and abroad.

The EIA’s outlook is contrary to UBS’ view of the future oil market, however.

UBS expects crude oil prices to rise in 2023 for several reasons. The analyst cites those as: China’s reopening and concurrent rise in oil demand; a return to oil demand growth for emerging Asia; a fall in Russian oil production on the back of the European Union’s embargo on Russian crude and refined products; and growth in production outside the OPEC+ group – primarily driven by the US.

As a result, UBS expects OPEC+ to ease its production cuts once again in 2023 to rebalance the market and to provide more barrels to cover rising oil demand amid less Russian production.

“We therefore continue to expect oil prices to move above $100 per barrel over the coming months, with Brent trading at $110 per barrel at mid-2023 and end 2023.”

Production outpacing consumption

The EIA outlook hinges on global oil production outpacing consumption. However, it concedes that three key factors—Russia’s oil production and ability to export petroleum products; several non-OPEC countries’ ability to increase oil production; and China’s loosening of Covid-related restrictions—could “meaningfully affect our oil price outlook”.

Russia produced about 11% of the world’s oil in 2022. Therefore, the impact of heavy sanctions and Russia’s ability to supply its products are noted as one of the “largest sources of uncertainty” in the EIA’s forecast.

“We assume Russia will be able to reroute some of its petroleum exports subject to EU sanctions. But we do not expect all its refined product exports will find new destinations because of limited clean tanker availability, which will cause Russia to reduce their crude oil inputs to refineries and for their crude oil production to continue to decline. However, Russia’s ability to reroute its petroleum product exports depends on other countries’ willingness to buy Russia’s petroleum and the flexibility of global petroleum product supply chains.”

In terms of non-OPEC+ supply, UBS anticipates US production growth, which it believes will drive wider non-OPEC+ production in 2023. “We expect non-OPEC+ to add around 1.3 million barrels per day (bpd) in 2023.” However, UBS does not expect US supply growth to be as strong as in pre-pandemic years. By comparison, in 2018 – when oil prices were well below today’s levels – US oil production rose by 2.2 million bpd. “A big reason is because the supply response from US oil producers with short lead cycles (i.e., shale oil) to higher prices is different now than in the past,” said UBS. “Shale producers are more focused on capital discipline today—such as reducing debts or paying higher dividends—instead of increasing production growth.”

Other limiting factors are rising inflation, a tight US labour market, and supply chain constraints. “These factors are likely to slow production growth in 2023 as well, limiting US crude production growth to 0.6 million bpd in 2023, in our view.”

US production promise

The EIA agrees with UBS that while there is definite potential for US production growth, that growth remains uncertain because of relatively low capital investment from oil producers. Despite that, the analyst expects increases in drilling productivity and associated natural gas takeaway capacity from the Permian region will result in record annual U.S. crude oil production in 2023 and 2024.

The EIA then expects oil production in Canada, Brazil, and Norway collectively to grow 12% from 2022 to 2024 and that there could be growth from new sources, such as Guyana. However, “oil supply growth from these sources could be lower than we forecast because of delays in project start times”.

“China’s consumption could be less than we forecast at first if rising Covid-19 cases cause significant disruptions to economic activity and travel, particularly in early 2023.”

On the flipside, China’s oil consumption could end up being higher than expected in 2024 if the termination of Covid-related restrictions leads to higher and more sustained economic growth. “China accounted for about 15% of world petroleum consumption in 2022, so changes in petroleum consumption in China can have large effects on global oil balances and prices,” said the EIA.

“Our forecast for global consumption of petroleum depends on uncertain economic conditions—especially in China,” said EIA administrator Joe DeCarolis. “How China’s economy changes following its reopening from pandemic lockdowns could have a significant impact on global consumption of petroleum products.”
Source: Baltic Exchange

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