The oil market eval: Q4 2022 — energy & politics

by Scott McKnight, PhD

A Russian oil tanker close to Oslo, Norway

The top line

Oil prices were down 8% in the final quarter of 2022, torn between worries about tight supplies and weakening demand
Diesel was in crisis, but has eased somewhat
Russia’s exports (and revenue) are still high despite the sanctions and more recent G7-imposed price cap

Prices: Up-and-down, around-and-around

Brent crude closed out 2022 at $85/barrel, but began the quarter just above $92/b.

That year-end price can be interpreted in different ways: It’s $7 higher than where Brent started 2022. But it’s also $30 down from its peak of $128/b in March (or even $122/b in early June). Dealer’s choice.

Brent crude USD/b (July 2022-January 2023)

After all the ups and downs, the Brent crude oil spot price averaged $100/b in 2022. Its American cousin, WTI, averaged $95/b on spot markets. For both, they’re the highest they’ve been since 2014, inflation-adjusted. In other words, a smashing year for oil companies and oil-exporting countries.
The global oil market really doesn’t seem sure which way it’s going right now. The fourth quarter of 2022 showed just how unsure it is, trundling along between $80 and $95/b, seemingly desperate to jump on any big news—OPEC+ cuts, China’s re-opening, Fed rate announcements, strategic reserve releases, …

Snaphot of supply & demand

2022 saw growth in world oil demand of 2.3 million barrels per day. Sounds like a lot but it’s growth of just over .1%. Another similarly modest increase is expected for 2023. (Are all the big jumps in world oil demand behind us?).
On the supply side, Saudi Arabia and other Gulf exporters reminded the world that the world still needs what they’re selling. In October, the OPEC+ group that Saudi Arabia and Russia co-lead announced cuts (likely a sign that they’re worried about softening oil demand, too). Those cuts broke a five-month output growth streak. But even those cuts weren’t that big, and helped to bring down world oil supply by 190k b/d in November.
A small increase in global oil supply of about 0.7% is expected for 2023, and would bring total supply to about 100.8 m b/d.

The diesel crisis has (mostly) passed—and so too has the refinaissance

Diesel was a big story—and source of pain—in 2022, with supplies stretched like a pair of pre-pandemic jeans. The crisis in the diesel market drove up prices for everything from food to shipping, adding pressure on the post-pandemic recovery and incumbents looking to keep their jobs.
Russia was a big—and, if we’re honest, indispensable—part of this segment of the oil market. Russia’s diesel exports were down 600k b/d.
Trying to feed this demand (and deprive Russia of any wins), distillate inventories were drawn to their lowest point in decades.
Diesel markets were stretched thin even before Russia’s invasion with some 3.5m b/d of distillation capacity closed during the tough days of the pandemic.
The post-pandemic boom of 2021, which saw global GDP growth nearly 5%, saw workhorse fuels like diesel and gasoil surge.
The worst of the diesel may be past, though. New refinery capacity will come online in 2023, easing some of the stress and offsetting some supply losses from Russia.

Russia (and how we still need them)

Now to the part that no one wants to admit: we still need Russia.
Russia’s oil exports actually increased in the last quarter of 2022, hitting 8.1m b/d in total, their highest figure since April.
Shipments of Russian crude to the European Union nearly halved. Europe still bought 1.1m bpd in the final months of 2022, but that’s nearly 2.5m b/d below pre-war levels. It may not be a cold turkey approach, but it’s something close.
China, India and Turkey made up a big chunk of the difference, happy to get the cheap crude and ease their own import bills (and probably to stick it in the eye of the G7). For example, loadings to India hit a new high of 1.3m b/d last quarter. And then there’s an untold amount of Russian oil that ended up in corners of the world that we don’t know about.
The other part of the story we’d prefer not to talk about?—Russia’s export revenues were just under $16bn in the last quarter of 2022, a decrease of less than $1bn, mostly due to weaker oil prices and continued discounts.
With all this crude now ending up in hulls and less in pipelines, it was a nice year for freighters. But there are some real questions about just how much fleet capacity is available (and whether the shippers want to take the risk of moving Russian oil).

Big themes

·The final quarter of 2022, like much of 2022, was about geopolitics. G7 leaders were focused on punishing Russia for its war of aggression while also accessing its resources to keep the global economy humming and allies together. (Thought the group never did find a winning formula for convincing neutrals in the developing world that resisting Russia was both the right thing to do and in their best interest). Connected to this was incumbents everywhere worried about surging inflation (much of it caused by the energy crisis).
It was also a year of supply chain issues—in the global oil market, too. Would there be enough tankers to get Russian exports to sea to reach willing buyers in places like India, China and Turkey? Could refiners churn out the products, especially diesel, to feed the post-pandemic economic recovery (and supply gaps left by Russia)? Could frackers in the US find enough supplies and workers to take advantage of high prices (if their investors and executives actually wanted to increase oil and gas production—one of the 10 lessons from 2022), and so relieve some pressure on American consumers and their European allies?
The final quarter of 2022 showed how sentiment is split between fears of supply shortages (from overzealous EU embargoes and duplicitous OPEC+ cuts) and recession fears (from overzealous interest-rate hikes). As a result, oil prices now seem to be in a holding pattern, seeing if global economic activity will be as sluggish as expected, if Europe’s winter will get chilly, if the US dollar will ever weaken, what will happen in China (the world’s largest oil importer and second biggest oil consumer) and what will be the effects of embargoes of Russian crude and later oil products. The first quarter of 2023 is going to be another interesting one.