Oil Market Report – August 2023 – Analysis – IEA


Global oil prices moved steadily higher during July and into early August, reflecting a market tightening long projected by this Report. Deepening OPEC+ supply cuts have collided with improved macroeconomic sentiment and all-time high world oil demand. North Sea Dated rose by $10/bbl over the month to around $85/bbl, its highest since April. With output cuts hitting the heavy sour crude market hard, Dubai crude is trading at a rare premium to Brent, while the price of Urals crude has breached the G7-led price cap now making all Russian oil exports ineligible for G7 and EU maritime services.

In July, oil supply from the OPEC+ alliance fell by 1.2 mb/d to a near two-year low as a voluntary reduction from Saudi Arabia came into effect. At 50.7 mb/d, the bloc’s production was down more than 2 mb/d from the start of the year. Over the same period, producers outside the group ramped up output by 1.6 mb/d to 50.2 mb/d but limited non-OPEC+ gains are expected for the remainder of the year. The US, Brazil and Guyana lead the expansion, with exports from the trio rising by roughly 15% y-o-y to more than 9 mb/d in July, boosting the availability of light sweet grades in the Atlantic Basin. The US accounts for nearly 80% of global 2023 supply growth, or 1.2 mb/d of the 1.5 mb/d total. Next year, that share is set to slip as activity slows in the shale patch.

World oil demand hit a record 103 mb/d in June and August could see yet another peak. After months of lacklustre readings, OECD demand was revised up for May and June, with overall consumption returning to growth in 2Q23 after two quarters of contraction. Chinese demand was also stronger than expected, reaching fresh highs despite persistent concerns over the health of the economy. For the year, global oil demand looks on track to expand by 2.2 mb/d to 102.2 mb/d, its highest ever annual level. With the post-pandemic recovery having largely run its course and as the energy transition gathers pace, growth will slow to 1 mb/d in 2024.

Refiners are struggling to keep up with demand growth, as the shift to new feedstocks, outages and high temperatures have forced many operators to run at reduced rates. Tight gasoline and diesel markets have pushed margins to six-month highs. While naphtha remains under pressure, due to competition from cheap LPG and weak petrochemical activity outside of China, high-sulphur fuel oil has tightened significantly as refiners replace lost OPEC+ crude with lighter and sweeter grades. High sulphur fuel oil in Rotterdam rose above North Sea Dated for the first time in 28 years.

As a result, crude and products inventories have drawn sharply. In July, observed oil stocks decreased for a third consecutive month, with OECD industry stocks more than 100 mb below the five-year average. Market balances are set to tighten further into the autumn as Saudi Arabia and Russia extend supply cuts at least through September. An ample OPEC+ spare capacity cushion of 5.7 mb/d means there is significant scope for the alliance to raise output later in the year. Additional supplies of heavy sour crude would allow refiners to boost activity and help ease product market tensions. But if the bloc’s current targets are maintained, oil inventories could draw by 2.2 mb/d in 3Q23 and 1.2 mb/d in the fourth quarter, with a risk of driving prices still higher.



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