The Top 4 factors affecting the Oil Market trends are:
- Record-high global oil demand: World oil demand is reaching record highs, driven by strong summer air travel, increased oil use in power generation, and surging Chinese petrochemical activity. Global oil demand is set to expand by 2.2 million barrels per day (mb/d) to 102.2 mb/d in 2023, with China accounting for more than 70% of growth.
- Uncertain oil market fundamentals: The momentary bump in crude oil prices following the April 2023 announcement of production cuts was fully offset by macroeconomic concerns within two weeks. The key market features in the first half of 2023 were a lack of inventory draws (signaling weak market fundamentals) and macroeconomic concerns weighing on commodity markets in general.
- World GDP growth: The outlook for the oil market in 2023 is influenced by the world GDP growth forecast at 3.2%. This assumes that the ramifications of the pandemic, geopolitical developments in Eastern Europe, and global financial tightening amid rising inflation do not negatively impact the 2023 growth dynamic to a major degree.
- Rising global oil production: Global liquid fuels production is forecasted to increase by 1.4 million barrels per day (b/d) in 2023. Non-OPEC production increases by 2.1 million b/d in 2023, which is partly offset by a drop in OPEC liquid fuels production. In 2024, global production increases by 1.7 million b/d, with 1.2 million b/d coming from non-OPEC countries.
The oil market’s fluctuations significantly impact currency and financial arenas. High oil demand can strengthen oil-exporting nations’ currencies, while unstable fundamentals and volatile prices trigger financial market instability. Geopolitical tensions and GDP growth projections add further uncertainty. These variables can sway investor sentiment, influencing exchange rates and prompting adjustments in central bank policies, shaping the interconnected landscape of currencies and finance.
Record-high global oil demand
The record-high global oil demand is driven by several factors, including strong summer air travel, increased oil use in power generation, and surging Chinese petrochemical activity. The International Energy Agency (IEA) reports that global oil demand reached a record 103 million barrels per day in June 2023, with China accounting for more than 70% of the growth.
The summer season typically sees a surge in air travel, leading to higher oil consumption. Additionally, increased oil use in power generation contributes to the growing demand. In China, petrochemical activity has experienced significant growth, further driving up oil demand. The IEA expects global oil demand to hit an average of 102.2 million barrels per day in 2023, marking the highest annual level.
Despite the current record-high demand, growth is expected to slow down in 2024 due to the clean energy transition and the global economic recovery from the pandemic. The IEA forecasts that oil demand growth will slow to 1 million barrels per day in 2024, with tighter efficiency standards and the increasing adoption of electric vehicles weighing on oil consumption.
In summary, the record-high global oil demand in 2023 is driven by strong summer air travel, increased oil use in power generation, and surging Chinese petrochemical activity. However, the growth in oil demand is expected to slow down in 2024 as the clean energy transition progresses and the global economy recovers from the pandemic.
The record-high global oil demand is driven by strong summer air travel, increased oil use in power generation, and surging Chinese petrochemical activity. The International Energy Agency (IEA) reports that global oil demand reached a record 103 million barrels per day in June 2023, with China accounting for more than 70% of the growth
Uncertain oil market fundamentals:
Uncertain oil market fundamentals have been a key feature in the first half of 2023. The momentary bump in crude oil prices following the April 2023 announcement of production cuts was fully offset by macroeconomic concerns within two weeks. The lack of inventory draws during this period signaled weak market fundamentals, with macroeconomic concerns weighing on commodity markets in general.
OPEC+, a group comprising the Organization of the Petroleum Exporting Countries and allies including Russia, has been cutting oil output since November in the face of flagging prices. Members Saudi Arabia and Russia, the world’s biggest oil exporters, deepened oil supply cuts in an effort to send prices higher. However, the move only briefly lifted the market, as benchmark crude prices shed those gains shortly after.
Global oil inventories increased by an average of 600,000 barrels per day (b/d) in the first half of 2023, and the EIA forecasts they will decrease by an average of 400,000 b/d in the second half of 2023. The ongoing slowdown of the global economy continues to put downward pressure on commodity markets, with high prices and rising borrowing costs constraining consumers and businesses.
The surprise OPEC+ supply cuts announced in April risked aggravating an expected oil supply deficit in the second half of 2023 and boosting oil prices at a time of heightened economic uncertainty. Despite the extension of OPEC+ production cuts, global liquid fuels production is forecasted to increase by 1.5 million b/d in 2023 and by 1.3 million b/d in 2024, primarily because of growth from non-OPEC producers.
In conclusion, uncertain oil market fundamentals in 2023 have been characterized by a lack of inventory draws and macroeconomic concerns weighing on commodity markets. The momentary bump in crude oil prices following production cuts was short-lived, as global economic slowdown and other factors continue to impact the oil market.
Despite the extension of OPEC+ production cuts, global liquid fuels production is forecasted to increase by 1.5 million b/d in 2023 and by 1.3 million b/d in 2024, primarily because of growth from non-OPEC producers. Uncertain oil market fundamentals in 2023 have been characterized by a lack of inventory draws and macroeconomic concerns weighing on commodity markets.
World GDP growth:
The outlook for the oil market in 2023 is influenced by the world GDP growth forecast at 3.2%. This assumes that the ramifications of the pandemic, geopolitical developments in Eastern Europe, and global financial tightening amid rising inflation do not negatively impact the 2023 growth dynamic to a major degree.
Geopolitical developments in Eastern Europe, such as the ongoing conflict in Ukraine, have the potential to impact the region’s political and economic landscape. The conflict has led to increased uncertainty in the global economy, affecting commodity markets, including oil. Furthermore, the European Union is facing various geopolitical challenges, including tensions with Russia and NATO, cyberattacks, and strategic competition between the US and China. These factors can contribute to fluctuations in the oil market and global economic growth.
Global financial tightening amid rising inflation is another factor influencing the oil market. Central banks in major developed economies have been tightening monetary policies to combat inflation. Higher interest rates and subdued global growth can put a drag on economic activity, affecting oil demand. Inflationary pressures have been driven by factors such as supply bottlenecks, increased government spending during the pandemic, and rising oil and food prices.
The global economy has shown resilience in the face of tightening financial conditions, with growth in emerging markets like China and India offsetting slowdowns in Europe and the Americas. However, the global GDP growth is projected to slow down from 3.0% in 2022 to 2.3% in 2023. As inflation subsides and monetary policies ease, global growth is expected to pick up to 2.7% in 2024 and 3.0% in 2025.
In conclusion, the outlook for the oil market in 2023 is influenced by the world GDP growth forecast at 3.2%, assuming that the pandemic’s ramifications, geopolitical developments in Eastern Europe, and global financial tightening amid rising inflation do not negatively impact the growth dynamic. These factors contribute to the uncertainty in the oil market and can affect oil prices and demand.
Rising global oil production:
Rising global oil production is forecasted to increase by 1.4 million barrels per day (b/d) in 2023, with non-OPEC production increasing by 2.1 million b/d in 2023 and 1.2 million b/d in 2024. This growth in non-OPEC production is expected to offset the drop in OPEC liquid fuels production.
The United States, Canada, Brazil, Norway, and Russia are among the non-OPEC countries contributing to the increase in oil production. The US is expected to be the leading source of supply growth, with Canada, Brazil, and Guyana also hitting annual production records for a second consecutive year. In Brazil, the growth in production is attributed to increased output from floating production, storage, and offloading vessels.
Higher oil prices, spurred by Saudi Arabia’s extended voluntary production cuts, are creating incentives for non-OPEC producers to ramp up their output, allowing for growth in global oil production to continue in 2023 and 2024. The EIA projects global oil production to increase by 1.4 million b/d in 2023 and by 1.7 million b/d in 2024.
Despite the extension of OPEC+ production cuts, global liquid fuels production is forecasted to increase primarily due to growth from non-OPEC producers. The ongoing growth in non-OPEC production is expected to help meet the rising global oil demand, which is set to reach a record 101.7 million barrels per day in 2023. In conclusion, rising global oil production is driven by increases in non-OPEC countries, including the United States, Canada, Brazil, Norway, and Russia. These countries are expected to contribute significantly to the growth in global oil production in 2023 and 2024, offsetting the drop in OPEC liquid fuels production.
Conclusion:
In the dynamic landscape of the oil market in 2023, several key factors are shaping its trajectory. The surge in global oil demand driven by various sources highlights the industry’s resilience and adaptability. Yet, the market remains complex, influenced by uncertain fundamentals, geopolitical tensions, and the delicate balance of production adjustments. As the world’s GDP growth, particularly in the face of geopolitical challenges and financial tightening, continues to cast its shadow, non-OPEC nations are stepping up to bolster production. This intricate interplay of forces propels the oil market forward, making it crucial to monitor how the evolving energy transition and economic recovery will guide its path in the years to come.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.
