Crude Conundrum

07.12.2022: The Organization of Petroleum Exporting Countries (OPEC) released its oil market outlook for 2023, suggesting demand will continue to outstrip supply well into next year. The organization expects global oil demand growth to outstrip the increase in supply by one million barrels/day next year. The report suggests OPEC would need to significantly hike production, even as members are already falling behind their output targets.

Bloomberg recently reported that the Vienna-based oil export organization projects global demand to expand by 2.7 million barrels/day next year, fueled by growth in emerging economies, while supplies outside OPEC will increase by 1.7 million/day. To balance supply and demand, the report elaborated, OPEC would need to provide an average of 30.1 million barrels/day in 2023. That’s 1.38 million barrels/day more than the cartel’s 13 nations pumped in June, according to Bloomberg.

Apparently, energy investors don’t share OPEC’s enthusiasm. Notwithstanding the projected supply and demand imbalance, they’re bracing for weaker crude prices next year. Crude oil futures are trading at $82/barrel in June 2023, off nearly 20 per cent from current levels and down from $98/barrel futures contracts as recently as last month.

Graph 1, Market Update, 7.12.22

US production is currently situated about one million barrels/day below its pre-pandemic peak of 13.1 million barrels/day. Like many other industries, domestic oil producers cut capacity and laid off workers during the pandemic. Recall oil plunged to negative $35/barrel in 2020, forcing companies to cap wells and shed assets.

Graph 2, Market Update, 7.12.22

The number of rigs deployed, according to Cresset’s model, is consistent with $40 oil, not $100 oil. We believe with a more favorable regulatory environment and some near-term easing in demand domestic production could reach pre-pandemic levels sometime next year. Meanwhile, fears of an aggressive Fed spurring recession risks are weighing on crude, falling from $123/barrel in February to under $100 today.

Graph 3, Market Update, 7.12.22
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