Oil market to remain in surplus despite cuts: IEA

Oil demand is expected to reach a total of around 102-million barrels per day in 2023 due to the re-opening of the Chinese economy post-Covid and a rebound in air traffic, Dubai Mercantile Exchange said on Wednesday as the US Energy Information Administration (EIA) suggested that oil market would remain in surplus despite the surprise Opec cut.

The International Energy Agency (IEA) predicted that the global oil market will remain in surplus this year and next as demand growth could be hurt by lower-than-expected economic growth in the coming months.

In its latest Short-Term Energy Outlook, the IEA said despite Opec and Russian production declining, it expects global oil production to increase by 1.5 million bpd in 2023.

If the Opec+ cuts expire, the EIA sees global oil production averaging 103.25 million bpd and consumption averaging 102.72 million bpd in 2024.

This year, global oil production is set to average 101.3 million bpd, while global oil consumption is estimated at 100.87 million bpd. The surplus on the market will start to shrink this quarter, but even in Q3 the market will be in a slight surplus, the EIA said.

IEA’s forecast came as crude prices returned on to the recent highs seen after Opec+ announced it would cut production by another 1.6 million barrels per day.

The EIA said Brent crude is expected to average $85.01 this year, up 2.5 per cent from the March forecast, and prices for the global benchmark will likely average $81.21 in 2024, up 4.7 per cent from the previous forecast. The EIA also raised its forecast for West Texas Intermediate crude prices by 2.8 per cent to $79.24 a barrel this year, and by 5.1 per cent to $75.21 next year.

The EIA Administrator Joe DeCarolis said while the Opec+ production cut is significant, “we expect growing global production to offset those cuts.”

According to the EIA, increasing risks in the US and global banking sectors raises uncertainty about macroeconomic conditions and their potential effects on liquid fuels consumption, which increases the possibility of liquid fuels consumption being lower than our current forecast. “We expect global oil markets will be in relative balance over the coming year,” EIA analysts said.

Global oil inventories, which increased by 400,000 bpd in 2022 and by 1.1 million bpd in the first quarter of 2023, will be mostly unchanged during the second half of 2023, the EIA predicts. Inventory builds will average about 500,000 bpd beginning in 2024 if the Opec+ cuts expire at the beginning of next year.

Oil market analysts said that since Opec's surprising decision to cut production, the price reached highs of $81.69 on April 3 and $81.81 on April 4. A move above these highs would push the price to its highest level since January 27, when it touched $82.48. Furthermore, other significant swing highs from January 18 and 23 were at $82.66 and $82.64, respectively.

They said if the price surpasses the resistance cluster ranging from $82.48 to $82.66, traders will likely target the 200-day moving average at $83.93 (refer to the green line in the chart below). Notably, crude oil prices have not traded above this moving average since August 30, 2022.

“The effects of rising interest rates have yet to be fully felt on global markets and energy markets wait to see what impact this may have on oil demand. Contagion from the US also spread to Europe with the fire sale of Credit Suisse to its rival UBS. US crude flows reached record levels to Europe in 2022 and continued at high levels in Q1 2023 due to a decline in Russian exports,” DME report said.

Citigroup said in note that it is estimating that prices will fall below $80 on China’s slower-than-expected recovery.

• Business