Top oil forecasters split on early 2023 market balances amid OPEC+ uncertainty

Oil market watchers confused over signals on OPEC+'s next policy move will find little clarity in fundamentals, with the International Energy Agency, OPEC's analytical arm and the Energy Information Administration at odds over supply requirements for the first quarter of 2023.

The oil market already voted with its feet on any potential 500,000 b/d production increase from OPEC+ this week, with Brent futures dropping 5% to a 10-month low before recovering on official denials that any such rise was being considered.

Only the US Department of Energy's EIA sees a need for OPEC to pump more oil in the first half of next year, with the Paris-based IEA and OPEC's Secretariat suggesting little scope for an increase. Meanwhile, S&P Global Commodity Insights' forecasts on fundamentals indicate OPEC may need to consider cutting production further.

The EIA puts the call on OPEC and stocks -- an estimate of the production volume required of OPEC countries to balance the global supply and demand for crude oil -- at 29.91 million b/d in the first quarter of 2023 compared with 28.46 million b/d in the fourth quarter of 2022. That would signal room for a significant U-turn by Saudi Arabia and its allies after having started to cut output by a headline 2 million b/d this month.

But the IEA and OPEC Secretariat see little room for maneuver, with the call on crude quarter-on-quarter showing little change.

S&P Global Commodity Insights sees supply outpacing demand by around 2.5 million b/d, largely due to expectations of weakening demand resulting from the global economic downturn and China's COVID lockdowns.

Swing factors

Much hinges on two huge unknowns: the degree to which Russian supply will come off the market after sanctions kick in on Dec. 5 and the impact of the accompanying G7 price cap, and when and how quickly China's demand will recover.

As Moscow struggles to redirect all its displaced oil, S&P Global expects Russian production shut-ins as a result of the new export hurdles to peak at 1.5 million b/d in the first quarter of 2023, but then to ease as more sanctions workarounds are found.

China meanwhile continues to confound oil bulls expecting a demand rebound in the commodity consuming behemoth.

With China's COVID cases resurgent and the likelihood of further extended lockdowns, Goldman Sachs has lowered expectations for China demand by 1.2 million b/d for this quarter, noting this is "equivalent to the effective cut recently implemented by OPEC+, the group's first successful preemptive curtailment."

Media reports of a proposed production increase ahead of OPEC+'s Dec. 4 meeting revealed the sensitivity of the market, leading to what some commentators called a "flash crash" in crude futures markets, before denials from key oil ministers saw ICE Brent retrace back toward the $90/b mark.

OPEC approach

If this was a test of the oil market, OPEC+ got one part of the answer.

"The precipitous drop in oil prices that followed the [Wall Street] Journal's story likely reinforced the view that even a partial reversal of the [OPEC+] production cuts would be a bad idea," said Helima Croft, head of commodity strategy at RBC Capital Markets.

With the Russia uncertainty on top of volatile oil prices (especially in recent days), deepening concerns -- particularly related to China and an ongoing US backlash over quota cuts -- OPEC+ has a tough decision to make. Commodity Insights analysts assume quotas will be rolled over at the upcoming meeting, but note that "another cut cannot be ruled out."

Indeed, while US pressure is deemed the biggest challenge to an OPEC+ cut, the mixed data on oil balances suggest that for now maintaining the status quo may be the preferred course of action.

"Should OPEC ministers see the Russian supply risks being to the upside and global demand risks being to the downside... there might be a case for a pre-emptive cut," Standard Chartered Bank said in a research note.

"However, as the data stands today, we think the optimal strategy for ministers is to continue with current targets at the next meeting and await firmer information on Russian supply and, if necessary, react accordingly at a later meeting," it added.

But Yousef Al-Shammari, CEO of consultancy CMarkits, believes a cut will happen, noting that "may bring prices back to the $90-95/b range". He added that the idea of an oil price floor mooted by many analysts in recent months could be reasserted around the $90/b if OPEC+ acts again.