Key conclusions
1. At the end of Q1 2023 a slight surplus was formed in the world oil market, which was reflected in the increase in commercial oil reserves. However, it is expected that already in the next quarter the balance in the oil market may change.
The IEA estimates show that OPEC+ supply cuts could worsen the expected oil supply deficit in 2H 2023, leading to higher oil prices during a period of increased economic uncertainty. Experts do not expect that growth of non-OPEC+ production and slowdown of industrial activity in OECD countries will help to balance the market.
In addition, the risks of spreading of the banking crisis in Europe and the USA and tightening of the monetary policy of the leading central banks have an impact on the balance of the oil market.
2. At the same time, in Q1 2023 there was a gradual recovery of the Chinese economy, which became a driver of oil demand growth, as well as an increase in oil consumption by India. In the USA and EU countries, on the contrary, against the background of weak GDP recovery, tightening Monetary Policy and specific weather conditions – oil demand was declining.
According to OPEC forecast, growing optimism about oil demand in China is countered by concerns about the state of the economy in the USA and Europe. Analysts increase oil demand estimates for Asia-Pacific countries and reduce demand forecast for developed OECD countries.
However, the actual amount of oil consumption may turn out to be lower than forecasted, which is caused by the growth of risks in the banking sector of the USA and other countries along with the increase of macroeconomic uncertainty.
3. In Q1 2023 there was a gradual increase in oil supply. The biggest contribution to the formation of oil supply growth in Q1 2023 was made by the USA, China, Norway, Mexico and Canada.
The imbalance in the oil market, price volatility and reduced investment in the industry prompted OPEC+ to decide to reduce oil production from May till the end of 2023.
According to OPEC forecast, the main drivers of oil supply growth in 2023 will be the USA, Brazil, Norway, Canada, Kazakhstan and Guyana, while the decline in oil production is primarily predicted in Russia.
4. In March 2023, there was a significant decline in oil prices due to several factors. The financial market rush caused by the upheaval in the banking sector in the USA and Europe resulted in concerns about a global recession and a decline in demand for oil and fuel. Weak demand from the USA and European countries was due to tighter macroeconomic policies to counter rising inflation and strikes at oil refineries in France.
However, in early April 2023, after OPEC+ announced production reduction, there was a significant increase in quotations of Brent crude oil. Investment banks began to revise short- and medium- term price forecasts upwards, expecting an imbalance in the oil market.
The further dynamics of quotations will be largely determined by the balance between the increasing demand from the APR countries, the decreasing volume of production by OPEC+ countries and the volume of supply by non-OPEC countries.
The current long-term (after 2027) consensus price forecast for Brent oil is about USD 70/bbl in real terms in 2023 prices.
