Global oil market fundamentals remain strong despite exaggerated negative sentiments
Recent data confirms robust major global growth trends and healthy oil market fundamentals. On the global economic growth front, and as the US economy continues the very strong growth it experienced in 3Q23, the IMF has recently upgraded Chinese economic growth projection for 2023 to 5.4%. However, potential downside risk to current robust global economic growth forecasts, although minor, may include sustained restrictive monetary policies to fight inflation, and geopolitical developments.
With this, and despite the overblown negative sentiment in the market regarding China’s oil demand performance, and global oil market in general, the latest data shows Chinese crude imports increasing to 11.4 mb/d in October, and remaining on track to reach a new annual record high for this year, at around the same level.
In fact, the Chinese crude imports remained very healthy, at a record level that is well above the five-years average range, rising by around 240 tb/d, month-on-month, with year-on-year crude imports at 1.2 mb/d higher. Similarly, India’s crude imports are
also expected to pick up in 4Q23, reaching a record high this year. As the global oil demand continues to demonstrate strength and resilience, with better-than-expected growth in 4Q23, mainly in non-OECD countries, the Secretariat’s latest forecast for global oil demand growth for 2023 is revised up to reach at 2.5 mb/d.
Evidently, Asian refining margins remain strong compared to historical levels. Jet/kerosene crack averaged $23.77/b against Dubai in Singapore. Expectations of an increase in international air travel activity during the holidays and possibly stronger export requirements to OECD Europe and Americas will most likely support jet/kerosene markets towards the year-end. The gasoil crack spread averaged $23.67/b against Dubai in Singapore in October (Graph 2). Even the gasoline crack spread averaged $3.90/b against Dubai in October, and improved to around $5/b at the beginning of November.
The supply picture also remains strong with non-OPEC supply revised up slightly to reach 1.8 mb/d for 2023, the US being the main growth contributor. Clearly, the US liquids supply growth has been stronger than what is suggested by weekly data. In fact, the weekly data which has been underestimating US crude production since January, as this were followed by significant monthly data upward catch-up trend, especially since August. The more reliable monthly data indicates a very gradual increase in US crude production.
The robust physical crude market is further reflected in the strong crude differentials seen in almost all regions in October and continued in early November. At the same time, and based on the available secondary sources to date, the overall OPEC-11 crude production in October remained well-below the agreed level related to production adjustments under the Declaration of Cooperation (DoC). For example, Nigeria has seen some production increase, but remained well below its required production level. It is also important to add that the recent increase in OPEC crude exports reflects seasonal trends.
Shipments from OPEC producers in Middle East tend to decline in the summer, amid higher demand for cooling and then rise again in September and October, as these volumes return to the market. For example, Saudi crude exports increase is quite normal as local demand drops in line with expected seasonality trend. Among non-OPEC participants in the (DoC), and despite the increase in its seaborne crude exports, Russia’s product exports have decreasing over the last few months.
With this supply/demand dynamics, global crude stocks have declined in 3Q23, reflecting high global crude runs, as well as the voluntary adjustments by DoC countries. Clearly, the recently overplayed observation of the increase in global inventories is simply due to the typical seasonal trends, particularly the heavy refinery maintenance. Overall, the global crude inventories remain below the 2017–2022 average.
Despite the above healthy and supportive market fundamentals, oil prices have trended lower in recent weeks, mainly driven by financial market speculators, as they have sharply reduced their net long positions over the month of October, compared to the late September, particularly in the NYMEX WTI futures and options contracts. In fact, data shows that hedge funds and other money managers have heavily cut their bullish positions over the month of October, selling an equivalent of 161 mb and 43 mb of NYMEX-WTI and ICE-Brent futures and options contracts, respectively. In total, they have sold an equivalent of more than 200 mb of oil since late September, or about 37% of total bullish positions. This has fuelled market volatility and accelerated the price decline (Graph 5). The selloffs were also observed in speculative positions in petroleum products in October, specifically for ICE gasoil in Europe. ICE gasoil net long positions fell by an equivalent of around 28 mb since late September.
Indeed, the above strength in market fundamentals would not have been possible without the precautious, proactive, and pre-emptive approach adopted by OPEC and non-OPEC Participating Countries in the Declaration of Cooperation (DoC). Going forward, countries participating in DoC will continue their commitment to achieve and sustain a stable oil market and provide long-term guidance for the market, in line with their decisions most recently reaffirmed during the 35th OPEC and non-OPEC Ministerial Meeting, which extended the agreement until the end of 2024. Clearly, the voluntary production adjustments by many DoC countries as of November until end-2024, along with extended Saudi Arabian voluntary crude production adjustment of 1.0 mb/d until the end of 2023 and the Russian extended voluntary adjustment of 300 tb/d in crude oil exports over the same period, will contribute significantly to achieve and sustain global oil market stability.