Although the futures term does not reflect this, many expect a much tighter oil market in the fourth quarter. Jeff Currie of Goldman Sachs has forecast prices to reach $110 in the third quarter, which is in line with the IEA’s expectation that the market will then tighten significantly, as shown in the figure below. Basically, the world will either have to cut supplies by 1.6 mb/d in the second half of this year, or OPEC+ has to increase production by that much, or prices will rise if the IEA’s expectations are confirmed.
IEA supply and demand balance forecast (mb/d)
Author from IEA data.
Yeah, here’s the rub, as Hamlet said at the barbecue. The IEA, like everyone else making short-term forecasts, has to make a number of assumptions about the behavior of various governments, which greatly compounds the uncertainty about market equilibrium. The table below shows the projected changes for the main variables. Most notable: the expectation of a 1 mb/d decline in Russian oil, which is based on the assumption that sanctions and the price cap will reduce their sales. So far it seems questionable, in which case the balance sheet would be much less tight.
Year-on-year change in IEA forecast (mb/d)
Author from IEA data.
One little-noticed change is the change in drilling in countries like Angola and Nigeria. Their production in January was 840 tb/d below their allocated quota, which supported prices last year. This is entirely due to low drilling during the pandemic, particularly in Nigeria, where drilling fell from fifteen rigs in 2019 to seven in 2021. In January, the rig count climbed to thirteen, while Angola, where the rig count increased by an average of four for the past few years, now nine are in operation.
This increased activity should restore some of the production lost since the pandemic; The production level in 2019 was essentially the same as the current quota. Naturally, higher production won’t happen overnight, and the overall loss won’t be completely offset in the short term, but by the end of 2023, the two could see production 300-400 tb/d higher than now.
Add to that increased production from Venezuela, where Chevron has already increased production by 40 tb/d to 90 tb/d, roughly half capacity. Conoco, ENI and Repsol, the other incumbents in Venezuela, have taken steps that could restore some of their operations. The ultimate impact could be to increase Venezuela’s production by another 200-300 tb/d by the end of the year, although this may be optimistic. If the country can increase maintenance, even more could be produced, but the political and legal situation is not very good for that to happen, at least not quickly.
Finally, Russia’s oil sector will be key to market balance at the end of 2023. If Russian production falls “only” by 400 tb/d, other OPEC+ members will not need to increase production. Which is good, because it’s unclear if they’re willing to do so. If Brent rises by $10 a barrel, will Gulf producers increase production? This would likely require an agreement from OPEC+, which may be difficult to achieve, but if the Saudis primarily want it, then it would be difficult for others to prevent it. The Saudis are an irresistible force, and others are a stubborn object rather than an immovable object.
A slightly optimistic assumption of production from Angola, Iran, Nigeria and Venezuela, where year-end production rose by 600 tb/d, implies additional reserves of almost 100 million barrels. And if Russian Q3 supply is forecast to be 500 tb/d higher than the IEA’s Q3 forecast and 750 tb/d higher in Q4, an additional 120 million barrels will be added to inventories, and the figure below shows this adjustment.
OECD, IEA inventories and author’s forecast (mb)
The author is based on the IEA forecast.
However, this also assumes that all the additional supply goes to OECD countries, and since they consume less than half of the global total, it would not be unreasonable to adjust the numbers accordingly. In that case, OECD stocks would fall by about 100 million barrels by the end of the year. This seriously reduces the market tightness seen in the IEA’s assumptions, but does not lead to a surplus.
Still, there is huge room for surprise on both the demand side and the supply side, which could improve results quite substantially. The priorities for market watchers should be: Russian supply, Chinese demand and US shale oil production in that order based on where the oil market ends up. However, in the absence of strong demand or supply-side surprises, it does not seem likely that the market will be exceptionally tight by the end of the year.
