• Evidence of demand destruction is appearing with preliminary September data showing that US gasoline consumption fell to two-decade lows. Buoyant demand growth in China, India and Brazil, nevertheless underpins an increase of 2.3 mb/d to 101.9 mb/d in 2023, of which China accounts for 77%. Growth slows to 900 kb/d in 2024, as efficiency gains and a deteriorating economic climate weigh on oil use.
• World oil output rose 270 kb/d in September to 101.6 mb/d, led by higher production from Nigeria and Kazakhstan. The Israel-Hamas conflict has not had any direct impact on oil flows. Driven by non-OPEC+ growth, global output will increase by 1.5 mb/d and 1.7 mb/d in 2023 and 2024, respectively, to new record highs. Overall OPEC+ output is set to decline in 2023, although Iran may rank as the world’s second largest source of growth after the United States.
• Refinery margins fell sharply from near-record levels over the course of September and into October, as gasoline and fuel oil cracks collapsed, but overall remained above the seasonal average. Global refinery throughput rates reached a summer peak of 83.6 mb/d in August, underpinned by record Chinese runs. Refinery crude runs are expected to rise by 1.7 mb/d in 2023 and by 1 mb/d next year.
• Global observed oil inventories tumbled by 63.9 mb in August, led by a massive 102.3 mb draw in crude oil stocks. Preliminary data suggest that on land inventories continued to draw in September, while oil on water rebounded as exports recovered. OECD industry stocks fell counter-seasonally by 6.5 mb in August to 2 816 mb, a substantial 105.3 mb below the five-year average.
• Russian oil export revenues surged by $1.8 bn to $18.8 bn in September, their highest since July 2022. Total oil exports rose by 460 kb/d to 7.6 mb/d, with crude oil accounting for 250 kb/d of the increase. The weighted average crude export price rose by $8/bbl to $81.80/bbl, narrowing its discount to North Sea Dated to $12.20/bbl, its lowest since March 2022.
• ICE Brent crude oil futures rose by $4/bbl after Hamas attacked Israel on 7 October as traders reassessed geopolitical risks. Tightening balances following Saudi Arabia’s extension of voluntary supply cuts had sent prices up by $8/bbl in September. However, gains subsequently dissipated in early October as renewed macro concerns took hold. At the time of writing, Brent traded at $87/bbl.

Escalating risks

A sharp escalation in geopolitical risk in the Middle East, a region accounting for more than one-third of the world’s seaborne oil trade, has markets on edge. The surprise attack by Hamas on Israel on 7 October spurred traders to price in a $3-4/bbl risk premium when markets opened. Prices have since stabilised, with benchmark Brent futures trading at around $87/bbl at the time of writing. While there has been no direct impact on physical supply, markets will remain on tenterhooks as the crisis unfolds.

Oil prices had already surged to almost $98/bbl in mid-September after Saudi Arabia and Russia extended their voluntary production cuts through year-end and as crude oil and distillate inventories drew to exceptionally low levels. Rising prices focused the market’s attention on the prospect that ‘higher for longer’ interest rates could slow economic and demand growth. By early October, Brent futures tumbled by more than $12/bbl to $84/bbl as supply fears gave way to deteriorating macroeconomic indicators and signs of demand destruction in the United States, where gasoline deliveries plunged to two-decade lows. 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 mb/d, of which China accounts for 77%. Global oil demand growth is set to slow to 900 kb/d in 2024 as the post-Covid rebound runs out of steam while the economic expansion slows and energy efficiency improvements weigh on oil use.

Global supply growth this year and next, of 1.5 mb/d and 1.7 mb/d, respectively, is dominated by non-OPEC+ producers. 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 mb/d below the call on its crude in 4Q23. If extra cuts are unwound in January, the balance could shift to surplus, which would go some way to help replenish depleted inventories. Observed global oil stocks tumbled by 63.9 mb in August, with crude oil down by a massive 102.3 mb.

Middle distillate markets are tight heading into the Northern Hemisphere winter. Ten months after the EU embargo on Russian crude came into effect, European refiners still struggle to lift processing rates and diesel output. Sustained high gasoil imports will be required, but stringent winter quality specifications constrain the available supply pool. It may take another mild winter to avoid shortages.

The Middle East conflict is fraught with uncertainty and events are fast developing. Against a backdrop of tightly balanced oil markets anticipated by the IEA for some time, the international community will remain laser focused on risks to the region’s oil flows. The IEA will continue to monitor the oil market closely and, as ever, stands ready to act if necessary to ensure markets remain adequately supplied.

Source: IEA