The Oil Market In 2023
A year of pinballing prices amid extraordinary OPEC+ market support despite unexpectedly robust demand to offset even more unexpectedly strong supply
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Demand growth was actually surprisingly strong in 2023, driven above all by voracious Chinese consumption gains, with a notable assist from India, that more than offset sluggish growth throughout much of the rest of the world.
Unfortunately for prices and OPEC+, non-OPEC supply also grew by leaps and bounds, supported by a doubling of expected US production growth, continued gains in Latin American offshore, and the resurgence of still-sanctioned Iranian output.
OPEC+, meanwhile, spent the entirety of the year on its back foot, announcing mounting production cuts that have lasted far longer than anticipated; excluding the emergency COVID cut in 2020, OPEC is now withholding more output from the market than at any time since 2008, all the more strange given demand trends.
Going into 2024, the key question will be if OPEC+ can manage to normalize production levels, which will require a realization of the broadly expected slowdown in US production growth and a broadening of demand growth away from China.
The oil market in 2023 was defined by false starts, dashed expectations, and softer than anticipated conditions that necessitated ever-more OPEC+ support. Crude prices fluctuated wildly, collapsing multiple times into the low $70s (Brent) in the first half of the year before rocketing to the high $90s in September, only to give back the entirety of those gains once again to end the year down ~$9/bbl, the worst performance for the barrel since 2020.
Undoubtedly, a strange year for crude—and that’s coming off of a string of some of the strangest years in oil market history. After the 2022 outlook whiplash of the IEA’s 3 MMbpd Russian supply loss that never arrived and China’s sudden COVID-zero policy-prompted demand collapse, demand was the big question heading into 2023. Would we get the much-feared central bank-driven recession that would depress oil demand or would demand roar higher on the resumption of pre-COVID consumption trends globally (e.g., China, international air travel, etc.)?
And, for the first half of the year, this question was the focus of macroeconomic headlines: are we dipping into a recession or not?! Oh no, a banking crisis! Etc. These fears were punctuated when, in just the first few months, Silicon Valley Bank (SVB) failed, which kicked off what I’ve been calling the SVB mini-banking-crisis. And there followed a brief but intense barrage of headlines detailing a string of US medium-sized banks failures on the back of poorly hedged interest rate exposure. The crisis contagion even went so far as to reach across the Atlantic to the storied Swiss bank Credit Suisse, which, in a spooky replay of the 2008 financial crisis, was merged with its Swiss sister bank UBS under government direction.
These headline worries then went on to have outsized price impacts, in large part due to the much-bolstered influence of speculative flows in and out of the crude futures market, which translated those headlines into a rollercoaster of short-term price volatility. But, those macroeconomic fears never really materialized. Recession probability models were flashing red heading in 2023, with some going so far as to predict a 100% probability of recession; it was chuckle-worthy at the time and turned out to be truly laughable in hindsight.
Meanwhile, demand growth turned out to be remarkably robust, averaging 2.4 MMbpd year-to-date—well above the pre-COVID average annual pace of nearer 1.4 MMbpd. In fact, these demand numbers would easily lead one to assume that the 2023 oil market was quite tight, with high prices and OPEC+ sitting pretty atop a growing pile of hard currency earnings. Except, we know that’s absolutely not what the year looked like with surging supply outside the OPEC+ production agreement spoiling the widely anticipated bullish party; so, what, exactly, went “wrong” with oil fundamentals in 2023?