Key conclusions
1. Despite the unprecedented geopolitical tensions, the second half of 2022 was characterised by a gradual recovery in oil demand. A relative market balance was reached in the second half of the year, mainly due to the introduction of lockdowns in China. At the same time, supply was growing at a higher rate mainly due to the release of US strategic reserves. This resulted in substantial commercial oil stocks in the OECD and a surplus in the market at the end of the year. Meanwhile, oil prices remained steadily high during the year amid a fragile balance achieved in early 2022.
Analysts expect significant changes in the oil market in 2023, with the balance forecast by the IEA to be determined by the speed of economic recovery in China and changes in oil production in Russia as a reaction to the EU price embargo on shipping oil and petroleum products. The USA could also have a key impact on oil supply growth by increasing production.
2. The slowdown in demand growth during the first half of 2022 was due to the introduction of strict quarantine measures in China, as well as weaker demand from OECD countries due to high energy prices and restrictions on imports from Russia. Risks of an economic recession and soaring inflation have forced central banks to tighten monetary policy, which has further constrained demand.
Since Q3 2022, oil demand has gradually started to recover amid seasonal factors and high gas prices. A recovery in demand from China, India and the Middle East supported global oil demand in Q4 of 2022. According to IEA forecasts, about half of global oil demand growth in 2023 will come from China, and the contribution will depend on the speed of easing restrictions and economic and business recovery.
3. In the second half of 2022, global oil supply showed strong growth and surpassed the 2021 peak of 100 million barrels per day. This year-end result was driven by increased production and sales of SPR oil reserves in the USA, rising production in OPEC member countries, as well as Norway, Brazil, Canada, Kazakhstan and Guyana. Despite significant pressure on the Russian Federation supply, Russian oil production for the year increased by 2.1%.
In Q3 2022, OPEC+ decided to reduce quotas by 2 mln bbl/d. However, the actual impact of this step on world supply was less significant as a number of countries have not fully utilised the allocated quotas: between January and October 2022, despite production increases, the deviation of actual production from quotas steadily increased.
The main drivers of oil supply in 2023 will be the market reaction to the Russian oil and products embargo, the increase of oil production and replenishment of strategic SPR reserves in the USA, and a possible increase of production by Venezuela.
4. At the end of 2022, the average price of benchmark Brent crude was USD 100.9/bbl and was at a stable high level in Q1-Q3 2022, with a decline to USD 85-95/bbl in Q4 in response to an increase in surplus.
Analysts expect global oil prices to remain highly volatile due to a still high risk of global recession. Price levels will also be affected by developments in Russian oil production, increased oil demand from China as a result of COVID-related measures easing, OPEC+ production quota policies, and the replenishment of the US strategic SPR reserves.
The long-term price forecast for Brent crude oil slightly increased from the previous period's forecast to around USD 70/bbl (in real terms in 2023 prices).
