Oil surged on US production outage amid arctic freeze

Oil slumped almost -23% in Q3CY23 and -11% in 2023 as overall global supply is higher than demand despite lingering Gaza/Read Sea and Ukraine war tensions. But oil also recovered in the last two months and surged over +9% on hopes of an early rebalancing amid OPEC+ additional production cut from Jan’24, lingering geopolitical tensions over the Gaza war/Red Sea disruptions and hopes of fresh economic sanction on Russia/Putin by the US/G7 after alleged killing by Russian opposition leader Navalny. On Friday, US President Biden blamed Putin for the prison death of opposition leader Navalny and promised ‘some actions’. Oil was also boosted by the report of upbeat driving demand from China amid the week-long Golden Lunar New Year holiday.

But oil was also undercut as the International Energy Agency (IEA) cautioned in its monthly report that global oil demand is losing steam, citing a significant decline in Chinese demand. IEA said in its Feb’24 MOR (Monthly Oil Report):

“Global oil demand growth is losing momentum, with annual gains easing from 2.8 mb/d in 3Q23 to 1.8 mb/d in 4Q23. A sharp drop in China underpinned an 830 kb/d decline in global oil demand to 102.1 mb/d in the last quarter of 2023. The pace of expansion is set to decelerate further to 1.2 mb/d in 2024, compared with 2.3 mb/d last year. China, India, and Brazil will continue to dominate gains.

World oil supply in January posted a sharp decline of 1.4 mb/d m-o-m after an Arctic blast shut in production in North America and as OPEC+ deepened output cuts. Record output from the US, Brazil, Guyana, and Canada will nevertheless help boost non-OPEC+ supply by 1.6 mb/d this year compared to 2.4 mb/d in 2023 when total global oil supply rose by 2 mb/d to an average of 102.1 mb/d.

Refinery throughputs are set to accelerate from a seasonal low of 81.5 mb/d in February. Atlantic Basin activity will recover from US weather-related disruptions that cut runs by up to 1.7 mb/d, despite a pickup in planned maintenance and as new capacity comes online in the non-OECD. For 2024 as a whole, refinery crude runs are forecast to rise by 1 mb/d to 83.3 mb/d, as a 330 kb/d decline in the OECD mitigates non-OECD gains.

Refining margins recovered from early-January weakness in the Atlantic Basin, led by the US Gulf Coast following the mid-month winter freeze. Although Singapore margins posted a narrow m-o-m gain, the $4.50/bbl increase on average in USGC margins was driven by the late-month rally in cracks that pushed Atlantic Basin margins to their highest level since late September.

Global observed oil stocks plummeted by about 60 mb in January, preliminary data indicate, with on-land inventories falling to their lowest level since at least 2016. In December, global stocks rose by 21.6 mb as a surge in oil on water (+60.7 mb) more than offset draws in on-land inventories (-39 mb). OECD industry stocks fell by 24.1 mb in December, reflecting declines in all three regions.

Amid intensifying hostilities in the Middle East and North American supply outages, ICE Brent futures rose by $5/bbl during January - their first monthly gain since September. The forward structure flipped from contango to backwardation, as diverted Red Sea tanker traffic congested Asia-Europe supply chains and delayed flows into the Atlantic Basin. At the time of writing, Brent was trading at $83/bbl.

Winter freeze

Global oil market balances tightened in January despite apparent demand weakness. An extreme Arctic freeze that swept through key oil-producing regions in the United States and Canada prompted significant supply outages that coincided with fresh voluntary output curbs by some OPEC+ countries. Escalating geopolitical tensions in the Middle East added further upward momentum, as oil tankers circumventing the Red Sea disrupted supply flows to global markets. Brent crude oil futures rose by $5/bbl during the month and were trading around $83/bbl at the time of writing.

The expansive post-pandemic growth phase in global oil demand has largely run its course. The pace of growth already eased sharply, from 2.8 mb/d in 3Q23 to 1.8 mb/d in 4Q23, with an apparent slowdown in China underpinning an 830 kb/d decline in consumption in the final quarter of the year. The deceleration will gather pace in 2024, with world oil demand growth forecast to average 1.2 mb/d, only half last year’s solid expansion. As of 2023, gains will be dominated by a few key countries, most notably China, and to a lesser extent India and Brazil. The three major economies are set to account for 78% of growth in global oil demand in 2024; that is forecast to reach a new peak of 103 mb/d.

While higher global oil supply this year, led by the United States, Brazil, Guyana, and Canada, should more than eclipse the expected rise in world oil demand, a sharp decline in output in January set the year off to a difficult start. Extreme weather conditions shut in more than 900 kb/d of production across North America. The steep loss coincided with fresh OPEC+ voluntary output cuts of around 300 kb/d, resulting in a massive 1.4 mb/d m-o-m decline in global oil supply. However, the rising wave of non-OPEC+ oil growth resumes in 2Q24, driving output on an upward trajectory for the rest of the year. World oil supply is set to increase by 1.7 mb/d to a record 103.8 mb/d in 2024, with non-OPEC+ providing 95% of the incremental barrels.

With the robust outlook for non-OPEC+ supply, our balances suggest a slight build in inventories in 1Q24 despite the extension and deepening of OPEC+ supply curbs. From 2Q24 onwards, a continuation of this strength could leave OPEC+ pumping above requirements for its crude oil if extra voluntary cuts are unwound in the second quarter.

Given heightened geopolitical risks and low global oil inventories, a modest surplus may help contain market volatility. While oil on water surged by 60 mb in December due to end-year tax considerations and as several tanker owners diverted ships away from the Red Sea to around the Cape of Good Hope, observed onshore stocks declined by nearly 40 mb. Preliminary data suggest further draws in January, of more than 60 mb, with observable on-land stocks falling to their lowest level since at least 2016, the start of our data series. Low oil inventories exacerbate the price impact of supply and demand shocks and may limit the industry's ability to respond to unexpected strength in demand or disruptions to supply.

OPEC+ Production/supply: 2023

Conclusion:

Overall, OPEC+ production was lower by around -0.31 mbpd in Jan’24 against -0.14 mbpd in 2023 on average.  This along with some production disruption (supply outage) due to the Arctic Freeze in North America, and elevated demand from Chinese refineries coupled with Red Sea shipping line disruptions resulted in the much-awaited rally in oil after heavy fall in Q4CY23.

Technical trading levels: Oil

Technically Oil (78.22) now has to sustain over 80.00 for any further rally to 82.00/83.00-84.00/85.00-90.00/95.00; otherwise sustaining below 79.50. may again fall to 74.00-70.00 in the coming days