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Oil Market Report - October 2022


Although crude oil prices broke through the support level of $90 / bbl for ICE Brent front-month contract in the late of September 2022, the downward swing was very short lived as shocking OPEC+ decision to curb crude oil production quotas by 2.0 mln bbl / d starting November 2022 pushed the price back above the support level. As the oil market failed the attempt to move lower, we are more confident now that there is only a limited downside in crude oil prices below the level of $90 / bbl for ICE Brent, as the supply side will get only tighter in next 3-6 months. In November 2022, the OPEC+ decision to curb oil production will come in force. Though the real reduction of the output will be around 1.0 mln bbl / d as some OPEC+ states have already been struggling to reach existing quotas, the OPEC+ plan to sharply curtail oil supplies to the market certainly derails the growth trajectory of oil supply through the remainder of this year and next and heightens energy security concerns as OECD industry inventories still has remained a steep 243 mln bbl below the five-year average. In December 2022, the EU embargo on Russian crude oil imports will comes into effect, which is expected to result in another 1.4 mln bbl / d of crude oil cut of Russia’s energy exports. In February 2023, the same will become true for petroleum products imports to the EU from Russia with further 1.0 mln bbl / d decline of Russia’s energy exports. And it is still very questionable whether Russia will be able to again re-route these additional volumes of exports to other countries successfully. In such circumstances, despite to continued economic turmoil in all major developed and many developing states, we believe that the oil market either has already passed its trough in the current cycle or would do it in the nearest future. However, weaker demand expectations will weigh on crude oil prices at least till the year end as the IEA has lowered its global demand forecasts for both this and next years, while major central banks continued to tighten their monetary policies fiercely. Nevertheless, we still believe that the economic outlook in the developed world would pass through its worst point in the 4th quarter of 2022, as both Fed and ECB will implement the most part of their expected monetary tightening over the period and decades-record inflation in the US and the EU will start to go down. All in all, we see the oil market to trade sideways in a month-long perspective with rather high probability of sharp, but short swings both upwards and downwards. Rational trade range bounds are estimated as $85-100 for the ICE Brent near-month contract.

The bulk of US energy equities outperformed strongly not only the broad US equities over recent 4 weeks, but underlying crude oil & natural gas prices as well. Thus, as of October 20, 2022, US Energy Sector ETF (XLE) soared approximately 10.0% relative to the level of a month ago and US Oil & Gas Exploration & Production ETF (XOP) showed a gain of 9.8% over the period, while S&P 500 index has still traded -3.9% lower than on September 20, 2022, longer-term (12-month and 24-month) strip prices of crude oil added roughly 2.0% and US natural gas prices tumbled by more than 20% comparing to a month ago. In result, US oil producers look relative overvalued to underlying commodity prices at the moment. As we see no enough grounds for such outperformance of energy stocks over the month behind, except for a certain rebound of the oil market, and taking into consideration still very shaky market environment and a lack of catalysts of their further relative growth, we recommend to hold naked short position in US Energy Sector ETF (XLE). However, we also repeat our earlier advice to open long positions in US E&Ps with strong fundamentals and/or additional growth drivers such as Pioneer Natural Resources (PXD), Ovintiv Inc (OVV), EQT Corporation (EQT), Hess Corp (HES), ConocoPhillips (COP) and Diamondback Energy (FANG) in case of crude oil and/or equity markets downward swings.

Selloffs extended in commodity and equity markets in September 2022, driving crude oil prices to their lowest levels since January 2022. Major US equity indexes dropped to new yearly lows in the month as well. Volatility remained elevated in September 2022, along with a further decline in market liquidity, reflected in continuing declines of open interest in major futures contracts ICE Brent and NYMEX WTI. In the first week of the month, the total open interest of combined futures and options in ICE Brent and NYMEX WTI dropped to the lowest level since December 2014. Trading volume in both contracts also declined in September 2022. The ICE Brent front-month futures lost in September 2022 $7.17 on a monthly average basis, or 7.3%, to stand at $90.57 / bbl, and the NYMEX WTI front-month contract fell by $7.68, or 8.4%, to average $83.80 / bbl.

The severe drop in crude oil prices was driven additionally by growing concerns about slowing global economic growth and energy demand as central banks around the world consistently raised their benchmark interest rates in an attempt to contain high inflation. Global manufacturing activity also weakened, especially in the OECD region. Worries about economic and demand outlooks superseded oil supply concerns due to trade dislocations. Investors in the futures markets reacted strongly to macroeconomic indicators after several central banks raised interest rates following the US Federal Reserve's benchmark rate increase of 75 basis points in the September meeting. The value of the US dollar rose to levels not seen in more than two decades, adding downward pressure on commodities priced in US dollars, including crude oil.

In the first half of September 2022, crude oil prices came under further pressure on renewed COVID-19-related lockdown measures in China, including in the megacity of Chengdu. However, authorities in Chengdu gradually eased the lockdown in the second half of the month. Oil prices also declined on softening gasoline demand in the US and higher US commercial crude oil stocks in the first half of September 2022. Moreover, the announcement from the US Department of Energy (DOE) of an additional Strategic Petroleum Reserves (SPR) release of 10 mln bbl in November of 2022 added downward pressure on prices. However, oil price declines were limited by expectations of rising gas-to-oil switching during the upcoming winter season amid soaring gas prices, especially in Europe. Investors also weighed a potentially lower oil supply amid persistent geopolitical tensions in Eastern Europe, while European Union member countries were expected to ban seaborne imports of crude oil from Russia by the end of 2022.

The rebound that began on the oil market in late September continued during the first days of October 2022, fueled initially by rumors that the OPEC and its allies considered a 1 mln bbl / d production cut, the biggest such reduction since the pandemic, in an effort to lift crude prices. Crude oil prices soared further during the first week of the month up to more than $98 / bbl for ICE Brent and $93 for NYMEX WTI active contracts, respectively, after the OPEC and its key allies including Russia really agreed to cut production quotas by 2 mln bbl / d on October 5, 2022, the largest reduction since April 2020. As several OPEC+ nations have already been struggling to reach existing quotas, the true output reduction may be about 1 mln bbl / d, starting from November 2022. Nevertheless, western governments were furious after the OPEC+ decision to slash oil production, blaming the cartel and especially Saudi Arabia for becoming Russia’s allies in its stalemate with the western world.

However, the rally on the oil market turned out to be short lived with prices falling back to $90 for ICE Brent and $83 for NYMEX WTI active contracts, respectively, during the second decade of October 2022, as the OPEC+ decision to cut output worsened demand side concerns. Thus, the IEA warned that higher oil prices due to unsophisticated OPEC+ actions may prove the tipping point for a global economy already on the brink of recession and slashed its forecast for world oil demand growth next year by more than 20 per cent, while the IMF said that for many people, 2023 will "feel like a recession", as it cut its GDP growth forecast to 2.7 per cent from an earlier prediction of 3.2 per cent. Crude oil prices put under an additional pressure in the middle of the month after the US administration decided to release another 15 mln bbl in December 2022 as part of the 180 million barrels the administration had announced earlier this year and confirmed that it may release "significant" additional barrels this winter beyond the December if needed.

Nevertheless, due to the rally in the first decade of October 2022, both ICE Brent and NYMEX WTI front-month contracts soared during the period under report, for the first time over last three and four months, respectively. The ICE Brent active contract added $2.44 relative to the level a month ago, or +2.7%, to settle at $93.06 / bbl as of October 20, 2022. The NYMEX WTI near-month contract moved higher by $1.60 as against with the level of September 20, 2022, or +1.9%, and ended the period under report at $85.54 / bbl.

OPEC’s total crude oil production proceeded to expand in September 2022 for the 17th straight month, adding another 230 thsd bbl / d by contrast with the level of August 2022, or +0.8% MoM. So, the volume of OPEC’s total crude oil output rose in the month under review to its new maximal print since April 2020 of 29.89 mln bbl / d. Notwithstanding the prolonged growth of the output, the OPEC still has lagged the conformed schedule of its production cuts adjustment, producing in September 2022 nearly 1.25 mln bbl / d less crude oil than it should with Nigeria and Angola being the main laggards. As for annual dynamics, OPEC’s total crude oil output obviously showed more robust growth in September 2022, comparing to a monthly basis, along with preceding months. Thus, the total production of the cartel extended in September 2022 by 2.45 mln bbl / d relative to the level of September 2021, or +8.9% YoY, the 17th consequent month of annual expansion. The most material monthly growth of crude oil extraction in the month under review was recorded in Libya. The output ramped up there by 120 thsd bbl / d comparing to the level of the previous month, or +11.1% MoM, as the country managed to boost its oil production further following an agreement between the Government of National Unity and some tribal groups in the eastern region in July 2022 that led to the reopening of major oil fields and ports after being closed in April of the same year. The output of crude oil continued to enlarge in Libya for the third month in a row and for the first time since March 2021 reached the potential level of 1.20 mln thsd bbl / d.

The 33rd OPEC and non-OPEC Ministerial Meeting, which was held on October 5, 2022, brought really shocking decision to adjust DOWNWARD the overall OPEC+ oil production by 2.0 mln bbl / d from the August 2022 required production levels, starting November 2022. After the end of the Meeting, western countries blamed the OPEC in general and Saudi Arabia in particular that the decision was inspired of Russia, which continued its attempts to use the energy market as a weapon in its stalemate with the western hemisphere, while the OPEC+ itself explained the decision by weak demand expectations in circumstances of coming recession in developed economies. However, taking into consideration the fact that not all the states participating in the OPEC+ had reached its production quotas in August 2022, already producing well below their ceilings due to capacity constraints, the real impact of the decision on oil production globally will be substantially lower. Thus, in accordance with estimates of the IEA, the real decrease of total oil output in OPEC+ will be around 1 mln bbl / d in November 2022, with the bulk of the cuts delivered by Saudi Arabia and the U.A.E. However, further production losses could come from Russia in December 2022, when an EU embargo on crude oil imports and a ban on maritime services go into full effect. Besides that, the Meeting agreed to extend the duration of the Declaration of Cooperation until December 31, 2023, to adjust the frequency of the monthly meetings to become every two months for the Joint Ministerial Monitoring Committee (JMMC), as well as to hold the OPEC and non-OPEC Ministerial Meeting (ONOMM) every six months in accordance with the ordinary OPEC scheduled conference. In accordance with the new rules, the next 34th OPEC+ meeting was scheduled for December 4, 2022.

World total oil production kept on expanding in September 2022 for the 5th straight month and grew further by 312 thsd bbl / d as against with the level of the month prior, or +0.3% MoM. Comparing to the local low of April 2022, the volume of total oil output worldwide was higher in September 2022 by more than 3.0 mln bbl / d. Moreover, more oil was produced in the world only once in history, namely in October and November of 2018, when the volume of the production exceeded 102.0 mln bbl / d. In such circumstances, total oil production around the world obviously was again considerably higher than it was a year ago, widened in September 2022 by 5.09 mln bbl / d in comparison with the level of September 2021, or +5.3% YoY, the 18th month of global supply expansion on an annual basis in a row. On one hand, the most considerable monthly growth of oil output in the month under consideration was registered in other ex-USSR states, whose aggregate oil production exploded in September 2022 by 264 thsd bbl / d relative to the level of August 2022, when the output tumbled to its lowest level over decades, or +10.0% MoM, as Kazakhstan managed to restore its crude oil exports via Black Sea terminals operating by the Caspian Pipeline Consortium (CPC). Brazil also provided strong improvement of its oil output in September 2022 in monthly terms. The production of the country grew within the month by 136 thsd bbl / d, or +3.2% MoM, the third straight month of expansion. Moreover, the extraction of oil increased in Brazil in September 2022 to its highest level on records, equal to nearly 4.41 mln bbl / d. On the other hand, the most material decline of oil production in absolute terms in September 2022 was experienced in the US, where total oil output shrank by 292 thsd bbl / d in compare to the level of August 2022, or -1.4% MoM.

According to the weekly US DOE data, US primary domestic oil production, counted as the sum of crude oil and NGLs production, increased in September 2022 by a humble amount of 19 thsd bbl / d comparing to the previous month, or tiny +0.1% MoM. Nevertheless, it was the 5th straight month of expansion of the production in the country, at least from a numerical point of view. In result, the volume of primary domestic oil production in the US rose to a new marginal high slightly above 18.0 mln bbl / d, remaining above the threshold for the second consequent month. It’s worthwhile to note that despite to the monthly expansion of the primary oil production in the US, the overall oil supply in the country dropped considerably in September 2022, losing as much as 292 thsd bbl / d in compare to August 2022, at least pursuant to the monthly data of the US DOE. In annual terms, US primary domestic oil production still showed a strongly positive performance, expanding in September 2022 by 2.11 mln bbl / d by contrast with the level of September 2021, or +13.2% YoY. From a yearly dynamics standpoint, the primary output continued strengthening in the US within 17 months in a row.

US total shale oil production proceeded to go up in September 2022 for the 5th straight month, despite to negative monthly dynamics of both the overall oil output and crude oil production in the country, and increased further by 323 thsd bbl / d in comparison with the level of August 2022, or +3.5% MoM. In result of prolonged period of expansion, the volume of shale oil output again rose to its record high over the whole history of observations in September 2022, equal to 9.68 mln bbl / d. As for yearly dynamics, the output of shale oil in the US also exhibited very strong performance in September 2022, along with preceding months, and increased by 1.20 mln bbl / d as against with the level of a year ago, or +14.2% YoY. The production of shale oil in the US kept on growing in yearly terms in September 2022 for 17 consequent months. The most substantial monthly expansion of production in the month under review was exhibited on the field of Permian. The output of the deposit increased in September 2022 by 3.4% MoM, or +188 thsd bbl / d relative to the volume of the previous month. It was the fourth consecutive month of production growth on Permian field, so the volume of the output ramped up to the new highest print during the whole history of observations, equal to 5.77 mln bbl / d.

According to the most recent monthly report of the IEA, the stronger economic headwinds have led the agency to lower its forecast for world oil demand growth for 2023 by 470 thsd bbl / d from previous month’s estimate, to 1.7 mln bbl / d. The revisions were underpinned by further downgrades to global GDP growth expectations from major institutions, with recession now expected in several European countries and risks increasing for emerging and developing economies. For this year, world oil demand growth has been further reduced, to 1.9 mln bbl / d from 3.2 mln bbl / d expected before Russia’s invasion of Ukraine. The still relatively robust headline figure masks a sharp slowdown underway, with demand now forecast to contract by 340 thsd bbl / d on an annual basis in 4Q22, despite increased gas-to-oil switching in power generation and industry.

OECD total commercial stocks of crude oil and petroleum products continued to grow in July 2022 for the 4th straight month, pursuant to the revised data, and increased further by 14.1 mln bbl relative to the level of June 2022, or +0.5% MoM. Nevertheless, the volume of the inventories still was below both the average and the minimal levels for the corresponding month of a year over last 5 years in July 2022, despite 5 straight months of expansion. The same time, OECD total commercial stocks of crude oil and petroleum products again were significantly lower in July 2022 than they were a year ago, along with several preceding months. To be more precise, the stockpiles narrowed in July 2022 by 184.2 mln bbl in compare to July 2021, or -6.4% YoY. OECD total commercial inventories of oil continued to decline on an annual basis for the 17th consequent months, though in July 2022 it was the less material yearly decrease of the figure over preceding 1.5 years.

According the preliminary IEA assessments, global observed inventories of crude oil and petroleum products rebounded further by 36.5 mln bbl in August 2022, as lower onshore inventories (-27.8 mln bbl) were offset by a surge in oil on water (+64.3 mln bbl). OECD commercial oil inventories continued to build as well, for a 5th consecutive month, by another 15 mln bbl in August 2022. However, the inventories remained a steep 243 mln bbl below the 5-year average, despite the release of 32.8 mln bbl of government stocks. They would have been significantly lower had it not been for the release of 185 mln bbl of IEA member country government stocks from March 2022 through August 2022.

US total stockpiles of crude oil and petroleum products expanded in September 2022 by 3.1 mln bbl relative to the level of August 2022, or +0.4% MoM. Nevertheless, the volume of the total stocks remained well below the lower bound of the range for the corresponding month of a year for recent 5 years and rather close to the multi-year low of 740 mln bbl, recorded in May 2022. As for performance in annual terms, US total inventories of crude oil and petroleum products oppositely demonstrated a significant deterioration in the month under review, along with preceding months, and dried up by 22.5 mln bbl, or -2.9% YoY, further deceleration of the speed of the decline. The inventories in the US proceeded to go down in September 2022 for the 18th straight month. Positive monthly dynamics of the overall oil inventories in the US in September 2022 was driven by expansion of crude oil stockpiles, while the inventories of petroleum products, on the contrary, continued to decline within the month.

The stocks of crude oil in the Cushing storage in Oklahoma (the basis for NYMEX WTI futures) continued to expand in September 2022 for the 3rd straight month and widened by another 0.7 mln bbl comparing to the level of the month prior, or +2.7% MoM. In result, the volume of the stocks rose to its highest print over recent 8 months of nearly 26.0 mln bbl and, therefore, again was slightly above the lower border of the range for the corresponding month of a year over last 5 years. It’s worthwhile to note that in September 2022 both the stockpiles in Cushing and commercial inventories of crude oil in all other storages in the US moved in the same direction, an uncommon situation during the most months of the year. As for yearly performance, the crude oil inventories in Cushing again showed strongly negative dynamics in the month under review, along with previous months. The stockpiles tumbled in September 2022 by 8.0 mln bbl relative to the level of the same month of the year prior, or still dramatic -23.6% YoY. It was the 18th month in a row of depletion of crude oil inventories in Cushing on an annual basis.

Global offshore inventories of crude oil reversed to the upside in September 2022 after two months of depletion in row and widened by 6.2 mln bbl comparing to the previous month, or +7.5% MoM. In result, the volume of the stocks moved slightly above the average level for the corresponding month of a year over last 5 years, though, truly speaking, it continued to fluctuate close to the average level for the fourth straight month. By the same token, global offshore inventories of crude oil were significantly lower in September 2022, as compared to the level of a year ago. So, the stockpiles exhausted by 22.6 mln bbl by contrast with the level of September 2021, or -20.4% YoY. From a yearly performance standpoint, the global inventories continued to deteriorate in September 2021 throughout the third consequent month. The most considerable monthly expansion of the stockpiles in September 2022 was recorded in Asia. Floating stockpiles of crude oil in the region expanded by 5.1 mln bbl by contrast with the month prior, or +10.2% MoM, the second consequent month of growth in a row.

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As the crude oil market is experiencing its largest 90-day decline since March-April 2020, which was only exceeded prior to 2020 by market routs in 2014-15 and 2008-09, we see the limited downside in crude oil prices from the levels achieved and believe that the market would pass its trough before the winter starts as the fundamentals remains rather tight and only would get tighter in a couple of quarters ahead. On the demand side, both the OPEC and the IEA expected a rather robust growth of the global oil consumption in 2023, driven mainly by jet fuel and robust oil use for power generation in the Middle East and in Europe due to record natural gas and electricity prices. In addition, petroleum product markets, especially diesel, are expected to remain in deficit in coming quarters due to downstream capacity constraints outside of China as lower Chinese export quotas have sharply reduced its sales abroad and newly introduced taxes in India have discouraged exports from Asia’s largest supplier. 

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