OPEC Basket Price Surge

The developments of the oil market in 2022 experienced two different trends in the first and second half of the year. While the recovery of the global economy continued with a different trend between different regions for most of 2022, it faced a significant decrease in the 4Q22 . The price of oil in the first and second months of 2022 was accompanied by a soaring trend due to the improvement of the global economy and the intensification of geopolitical tensions in Eastern Europe. Contractionary monetary policies by central banks and concerns about a possible energy crisis in the Eurozone drove prices up.

The EU’s decision to fill the strategic gas storage on the one hand caused an increase in the price of natural gas and an increase in the demand for crude oil in order to replace it in power plants, while on the other hand it accelerated the increase in the capacity of power generation from non-fossil sources due to the increase in the prices of fossil fuels in the 1H22. But in the 2H22, due to the resurgence of the COVID-19 in China and the country's strict zero-COVID policy, the country's GDP growth was affected in the 2H22, and due to the decrease in economic activities of member states of the OECD, the demand for oil experienced a weaker growth.

Due to the completion of gas storage according to prearranged plans in Europe and the easing of concerns regarding the energy crisis in the European winter season, as well as the phased release of strategic petroleum reserves (SPR) by OECD member states, crude oil prices were associated with a downward trend in the second half of the year.

OPEC+ Constructive Role

However, the constructive decisions of the OPEC+ members participating in the Declaration of Cooperation (DoC) according to the market conditions led to more stability and balance in the global oil market in 2022. Compared to last year, the price of the OPEC Reference Basket (ORB) showed an increase of $31.0 or 44.6%, from an average of $69.45 per barrel last year to an average of $100.45 per barrel in 2022.

It is worth noting that according to the latest OPEC monthly report, the growth of global GDP in 2022 is estimated at 2.8%. For American and European members of OECD, transportation fuel demand was lower than expected and led to an annual growth of global crude oil demand of 1.4 mb/d for OECD member states.

Along with the impact of central banks’ monetary policies on the global economy and crude oil demand, new lockdown in China has strongly affected oil demand, and the country reduced oil demand in 2022, so that the annual growth of crude oil demand in non-OECD countries reached 1.2 mb/d.

Meanwhile, the global demand growth for crude oil in 2022 has been 2.5 mb/d and on the oil supply side, the growth of non-OPEC oil supply continued. U.S. shale oil companies have continued to focus on dividend to shareholders and curbed output growth due to higher production costs amid tight supply chains and high inflation.

The main drivers of non-OPEC production growth in 2022 were the United States, Canada, Guyana, Russia, China and Brazil. The growth of non-OPEC supply in 2022 is estimated to have been 1.9 mb/d. For the moment, due to the increase in commercial oil storage in 2022 compared to 2021, the volume of oil storage of OECD member states at the end of 2022 was 114 million barrels less than the 2015-2019 average.

2023 Outlook

The conflicting forces in the oil market show that the short-term forecast of this market is associated with a high degree of uncertainty. On the macro scale, expecting a decrease in economic growth and even a recession in the US and Europe in the 4Q22 and the 1Q23 is considered one of the key factors that weakens the price, but at the same time, it is possible to forecast a reduction in movement restrictions in China due to the zero-COVID policy would reactivate and stimulate the economy of this country and increase the demand for oil while strengthening the volume of economic activities.

On the micro-scale, the decline in the supply of Russian oil due to the complete stoppage of crude oil imports from Russia by EU, although the application of a price cap for the purchase of Russian crude oil exports will also increase the dimensions of this issue and at least in the short term will put increasing pressure on oil prices. Due to these various and unequal forces affecting the oil market, the future perspective of the oil market is not very clear in the future.

Oil Demand and Supply Uncertainty

According to OPEC's latest monthly report, the growth of world gross production for the coming year is expected to be 2.5%, and global oil demand is expected to increase by 2.2 mb/d in 2023 compared to the previous year. Meanwhile, other sources, such as Oxford Energy, forecast that oil demand was 1.8 mb/d in 2022 only to fall to 1.5 mb/d in 2023.

It is now expected that oil demand will decrease by 0.91 and 0.59 mb/d in the fourth quarter of 2022 and the 1Q23, respectively, the most important factor of which is the weakening of economic growth, especially in the economies of advanced countries. The oil demand growth in OECD member countries in America is estimated at 0.3mb/d for 2023 based on the OPEC monthly reports, and this figure is insignificant for the European members of the Organization and is around 0.4 mb/d.

But at the same time, there are also strengthening factors for the growth of oil consumption in 2023. In non-OECD countries, oil demand is expected to increase by 1.9 mb/d, with China and India growing the most. The expected lifting of some of the restrictions related to zero-COVID policy in China next year is one of the most important drivers of oil consumption growth in 2023, and it is estimated that China’s oil demand will increase by about 0.550 mb/d in 2023.

China and Covid Restrictions

It is worth noting that in the 20th National Congress of China, the COVID-19 restrictions for international travelers to China have been lifted and therefore demand for travel to China has increased. In addition, the continued growth of demand for jet fuel to the extent of 0.68 mb/d in 2023 will be one of the main factors of oil consumption growth, which can partially offset the negative impact of the economic recession.

Russia's oil production outlook is one of the most determining factors in the short-term oil supply situation. In November 2022, excluding oil exports through pipelines, Russian crude oil exports to Europe decreased by 0.97mb/d compared to the period before the Russia-Ukraine tension (average of January and February 2022), but at the same time 1.14 mb/d of Russian crude oil has been sold to Asian buyers (mainly China and India), so Russian crude oil exports in March-November 2022 (after Russia-Ukraine tension) compared to January and February 2022 (before geopolitical tension) shows an increase of 0.284 mb/d.

This issue is also true regarding Russian oil products, and in general, it could be said that Russia’s petroleum exports (crude oil and oil products together) in the post-geopolitical tension period compared to the previous period have grown by an average of 0.329 mb/d.

Russia Oil Set to Fall

Now, according to the plans to stop the import of crude oil and oil products from Russia to Europe and the price cap policy, Russia is expected to see its oil exports fall by 2 mb/d, 1.1 mb/d of which would be sold to third nations, particularly India. Therefore, it is expected that by the end of 2023, Russian oil production will decrease by about 0.9 mb/d compared to the previous year. Moreover, non-OPEC supply in 2023 is expected to grow 1.5 mb/d.

Limited oil production in the United States and the start of production of offshore fields in Latin America and the North Sea are expected to increase supply. The United States is expected to lead the way with a share of about 75% of the total growth, followed by Norway, Brazil, Canada, Kazakhstan and Guyana, although the reduction in Russian supply due to EU sanctions is the main factor affecting the decline in non-OPEC oil supply growth in 2023.

The decrease in oil supply of non-OPEC+ countries due to the unplanned shutdown and the limitation of production capacity due to the reduction or stoppage of investment, operational and environmental challenges is the most important main driver of the weakness in the growth of oil supply in the short term.

This is due to the fact that many OPEC+ member countries do not have the capacity to produce in accordance with their quotas and the gap between the actual production of these countries and their announced quotas is gradually increasing.

Balance and Continuity of Excess Supply

According to the OPEC Secretariat estimates, the amount of oil supply in 2022 is estimated to be 0.41 mb/d more than its demand. It is expected that the oversupply will continue in 2023 with a lower intensity and reverse in the last quarter of the year, and oil demand will be 0.300 mb/d more than oil supply.

This is the first time since the 1Q16 that the oil market will face 6 consecutive seasons of excess oil supply, that is, from the 2Q22 to the 3Q023, so that the amount of oil supply in 2023 will be 0.58 mb/d more than its estimated demand. Due to the excess supply and demand balance, it is expected that the oil storage level of OECD member countries in 2023 will be 58 million barrels less than the five-year average of 2015-2019.

Of course, along with the revival of China's economy in the 2H23, the expectation that OPEC+ countries’ supply schedule will not change and the unilateral sanctions against Iran’s will be maintained, other sources such as Oxford Energy have projected that supply shortage in the oil market would be seen from the third quarter of 2023 in a way that demand for oil would be 0.43 mb/d higher than supply. 

Price Forecast and Different Approaches

Despite the uncertainty of the oil market and according to Oxford Energy institute's forecast, the price of Brent stabilized at an average level of $101.2 per barrel in 2022, which will decrease to $94.2 per barrel in 2023,. The forecast of a decrease in economic growth and oil demand in the 1Q23 will cause the price of Brent to go through a weakening trend during this period, and the average price of Brent in the 1Q23 will reach less than $90 per barrel.

This is in a situation where it is expected that in the 2H23, with the strengthening of economic growth, especially due to the cancellation of zero-COVID restrictions in China, Brent prices will rise again and cross $100 per barrel.

Goldman Sachs forecast, Brent climbing to $105 per barrel by the 4Q23 due to the solid demand growth particularly in China.

Investment

Although the annual investment in the upstream sector of the oil industry is lower than the pre-COVID annual investment, even including inflation in recent years, Investment in non-OPEC’s upstream sector in 2022 was estimated at $424 billion, up 19% from 2022 and in 2023 investment in non-OPEC nations’ upstream sector is expected to reach $459 billion, up from 2022.

Courtesy of Iran Petroleum