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OECD stock at 5-yr average; Brent to fall further to $73/bbl or lower

Global oil demand in 2023 is set to rise by 2m b/d to 102m. Asia-Pacific and China would command most of the growth.??Jet/kerosene demand (at ~91% of 2019 levels) is expected to increase on rebounding air traffic and pent-up China demand.

World oil supply rose in Feb’23 to 101.5m b/d, vs. 100.8m the month prior. (The rise comes from rebounding supplies from the US and Canada after winter storms and outages.) Global supply in 2023 is expected from non-OPEC adding 1.6m b/d to a well-supplied H1 2023.

Global refinery throughput fell further to 81.1m b/d vs. the previous month’s 83.4m, with the US still recovering from outages and maintenance shutdowns. (A drop was expected in Feb for scheduled maintenance, already highlighted in their last report). The IEA expects 2023 runs to average 82.1m b/d (up 1.8m y/y).

OECD stocks at 2,851m barrels, an 18-month high (vs. 2,767m in Jan’23), are near a five-year average of 2,865m, a huge indication of Brent prices falling. US, Europe and Japan data show a build of 7.8m barrels in Feb’23. Our calculation (see table below) shows average Brent prices based on OECD stock levels till our next month’s report have a mere 1% variance. At present stock levels, we arrive at a price of $73 a barrel.

Russian oil exports fell 0.5m b/d to 7.5m b/d in Feb’23 as the EU embargo and the G7 price cap on refined products came into force. Despite signalling a 0.5m b/d cut, Russian crude production was still strong in Feb'23 at 9.91m b/d (vs 9.78m the month prior, 10.05m a year ago). Crude oil exports dropped m/m by nearly 0.65m b/d, on a 2m b/d fall in shipments to the EU, a 0.3m b/d increase in exports to Asia, and a 0.3/0.24/0.18m b/d increase in exports to Africa/Turkiye/the Middle East. Export revenues are estimated at $11.6bn ($2.7bn lower m/m).

View. We believe that, in 2023, crude supply would be surpass demand and stock levels would rise, leading to a further fall in crude prices. Our last month’s update, of Brent prices expected to fall below $75 a barrel, stands. Falling crude prices would be positive for all Indian public-sector oil & gas companies; it would bring down energy costs, leading to greater demand and lower working capital. OMCs can better manage profitability by adjusting marketing margins, supported by more Russian discounted-crude sourcing. In Jan’23 and Feb’23, Indian refiners sourced 20-35% of their crude. Upstream realisations would come down and windfall/SAED could be removed (a huge positive for standalone refiners, which has been seen since the last revision). Our top picks: Chennai Petroleum, Bharat Petroleum, Reliance Industries (not rated), Mangalore Refineries.

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