MNI Commodity Weekly: Russia Sustains Strong Pace of Flows to Global Oil Market

Executive Summary:

Russian Crude and Product Exports Defy Expectations but Longer-Term Risks Remain: Russian oil and oil product exports remain buoyant, pressuring crude markets. Questions remain whether Russia’s fleet can sustain the pace longer term as inefficiencies pile up on longer journeys.

Global Oil Demand To Reach New Record In 2023: An OPEC/IEA/EIA Comparison: China’s reopening and the recovery in travel and transportation sectors is forecast to boost this year’s global oil demand to new record levels. OPEC sees this year’s demand to reach 101.9mbpd, IEA forecasts consumption to rise to 102mbpd and EIA estimates demand at 100.9mbpd.

Oil Market: Crude breaks through technical support levels to trade at the lowest since Dec 2021 as oil markets assess the impact of the financial turmoil on oil demand following the collapse of Silicon Valley Bank last week.

Gas Market: European gas pulls back as warm weather forecasts and strong renewable power generation offsets tight market concerns following a price spike due to French industrial action.

Russian Crude and Product Exports Defy Expectations but Longer-Term Risks Remain:

Oil markets have tussled with concerns about Russian oil and oil products falling off the market post western sanctions but data in March shows flows remain buoyant.

• Higher Russian oil volumes on the market have helped to add weight on crude prices, which along with bank collapse concerns have pushed intra-day WTI prices temporarily below $70/bbl March 15 for the first time since December 2021.
• High levels of Russian crude exports have been supported by Chinese demand picking up post lockdown, adding on top of already strong Indian demand.
• Vessel tracking firms indicate that ship-to-ship transfers out of Ceuta, north Africa and Kalamata offshore Greece have been the main regions moving Russian oil from its European facing ports to Asian markets. The redirection of flows has caused oil product on the water volumes to surge because of journey lengths.
• Looking at products, Russian clean flows into new markets are surging in March as vessels begin offloading product after their longer journeys post Feb 5 sanctions. Russian clean product flows into new markets are coming in above 1.6mn bpd so far in March, Dec to Feb levels hovered around 950,000 bpd.
• Russia’s clean product flows are finding increased demand from Turkey, Latin America, North Africa, the Middle East and Asia.
• Vortexa also claims that reports last week about increasing Russian oil product floating storage levels are being exaggerated and instead it is not unusual to see oil products taking a week or more to unload in its new markets.
• What remains to be seen is whether Russia can keep this pace up as empty vessels make the long journey back to Russia to refill.
• Rangebound European diesel cracks suggest the market is well supplied after making preparatory measures before Feb 5 to stockpile while flows from the Middle East are plentiful at present.
• Back to Russian crude, March is supposed to be the month that Russia reduced its oil production by 500,000 bpd in retaliation for western sanctions, but nothing so far suggests an overall reduction in supply to market – though any reduction would likely face a lag effect if the threats were true. Russia’s western ports are expected to show an overall slowdown in crude exports in March – dipping around 8% from Baltic ports to 1.5mn bpd based on loading programmes. Russia has said it intends to cut crude exports from western ports by 10% in March.
• The latest IEA monthly report holds up the buoyant Russia flow narrative. Russia's total exports of oil and petroleum products in February 2023 fell to 7.5mn bpd, from an average amount of 7.7mn bpd in 2022 (7.5 million bpd in 2021).
• The IEA said it now expects Russian oil production to stand at 10.4 million barrels a day this year, 300,000 barrels a day more than it was forecasting last month, but still 740,000 barrels a day less than in 2022.
• Ahead of any proposed cuts this month, Russia's oil and gas condensate production reached pre-sanctions levels - around 1.508 mn tonnes per day - for the first time in February according to Kommersant reports which explains why volumes are so high in March so far.

source: Vortexa

Global Oil Demand To Reach New Record In 2023 – An OPEC/IEA/EIA Comparison:

The rebound in Chinese economic activity and the recovery in the travel and transportation sectors is set to lift global oil demand to new records this year. Global oil demand is expected to peak in the last quarter of this year, while the effects of inflation and limited GDP growth in the OECD countries are likely to offset some demand growth, especially in the first half of this year.

• OPEC estimates global oil demand growth this year at 2.3mbpd to a total of 101.9mbpd.
• The group forecasts demand to be driven by the ongoing recovery in the travel and transportation sectors, mainly in China. China’s oil demand growth is expected to contribute 710kbpd this year, revised up from 590kbpd last month, as China’s reopening, following the lifting of its zero-Covid policy will add considerable momentum to global economic growth.
• Chinese oil demand saw a strong rebound of 0.8mbpd year-on-year growth in January, up from 0.2mbpd year-on-year increase in December. Demand in Dec-Jan was driven by requirements for petrochemical feedstock.
• Overall, OECD oil demand is expected to grow by 0.2mbpd and non-OECD demand is forecast to grow by 2.1mbpd. Demand growth has been adjusted lower for the first half of 2023 to account for the anticipated decline in the OECD region due to an expected slowdown in economic activity. Oil demand in non-OECD countries is revised higher due to improvements in economic activity in China, as well as expected improvements in Russian oil demand. Global oil demand is forecast to reach 103.39mbpd in the fourth quarter according to OPEC.
• IEA increased its global oil demand forecast this month by 100kbpd to 102mbpd, slightly above levels estimated by OPEC. Demand is expected to rise by 2mbpd on the year.
• In the second half of this year, China is expected to drive the world’s oil demand to record levels and demand is set to surge by 3.2mbpd from 1Q23 to 4Q23.
• EIA sees global oil demand growth this year at 1.5mbpd to 100.9mbpd, revised up by 0.4mbpd from last month’s projections and below forecasts from OPEC and IEA.
• Chinese consumption is expected to account for about half of the growth at 0.7mbpd to a total of 15.86mbpd in 2023, mostly in line with OPEC demand growth forecasts at 750kbpd.
• Other non-OECD demand growth is estimated at 0.7mbpd, of which India accounts for 0.2mbpd.
• OECD consumption growth remains largely unchanged at 0.09mbpd to a total of 46.01mbpd as the effects of inflation continue to limit GDP and oil demand growth.

source: OPEC

Oil Market:

Crude has seen volatile trading this week as the market assesses the fallout from the collapse of Silicon Valley Bank on financial markets. Concern for the impact of the financial risks and future US Feb rate hikes on global oil demand have pushed front month Brent down over 12% from a high of 86.68$/bbl on 7 March.

• Optimism for the demand growth in China has provided some support but not enough to counter the global demand growth concerns. The latest monthly OPEC report increased the oil demand growth forecast for China this year and an increase in crude processing at Chinese refineries in Jan and Feb - a further sign of a recovery in its economic activity. The IEA monthly report also forecast tighter supplies in the second half of the year largely due to a recovery in China. (see highlights above)
• The Brent Dec23-Dec24 time spread followed the market decline falling towards the bottom of the range for the year and lowest since 22 Feb. The prompt Brent spread however has held on to most of the strength seen this year while the WTI prompt spread is still in contango. Uncertainty still surrounds future Russian crude oil and product supplies although seaborne exports show no sign yet of a reduction due to sanctions and the announced 500kbpd production cut in March. (see top story)
• Diesel and gasoline margins have edged higher after a dip late last week. Gasoline is supported by a gradual rebound in US demand this year and the switch to summer grade gasoline. The refinery maintenance season is also providing support to refined products along with lower diesel exports from Asia and the Russia output uncertainty.

Gas Market:

European gas markets surged late last week from a low of around 40.6€/MWh to a peak of 53€/MWh due to the industrial action in France and supported by cooler weather last week as well as higher storage withdrawals.

• Coming into this week the return of above normal temperatures and healthy wind output in NW and central Europe have helped ease the tight supply concerns.
• The French strikes are causing LNG cargo delays and diversions. The strikes at Dunkerque LNG are expected until 17 Mar and another three terminals until 21 Mar. Stormy weather in the UK on Monday added to the LNG disruption. LNG deliveries to Europe and Turkey this month could be the lowest since October according to Kpler data.
• The industrial action has limited nuclear power and hydropower generation since late last week and raised concern for higher gas demand. Industrial action at EDF’s nuclear fleet in France has been extended until 16 March with capacity reduced by 6.1% on 14 March.
• Added concerns for gas demand are that nuclear electricity output could be constrained this year after EDF had to review its program of nuclear reactor checks following the discovery of defects at two reactors. EDF said they still plan to increase nuclear output this year from 279TWh in 2022 to 300-330TWh.
• European gas storage levels remain near the top of the five-year range at 56.37% despite higher than normal withdrawal rates last week.
• US Henry Hub has bounced between 2.4$/mmbtu and 2.69$/mmbtu this week with higher LNG exports and recovering supply to Freeport LNG offset by easing cold weather forecasts, steady production levels and healthy storage levels.
• The partial return of Freeport LNG has supported a market recovery from a low of below 2$/mmbtu on 22 Feb. Pipeline feed supplies to Freeport are up over 1bcf/d but still well below the full operational capacity of around 2.1bcf/d with the return to full service expected to take several weeks.

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