The average price of ICE Brent crude oil in the second quarter of 2023 (April 1 - June 30, 2023) remained stable at $77.75 per barrel, indicating tighter supply in the market compared to the previous quarter. Following the OPEC and its allies (OPEC+) meeting on April 3, 2023, a consensus was reached to reduce crude oil production by 2 million barrels per day until the end of 2023. Additionally, several countries, including Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Iraq, Algeria, Kazakhstan, and Gabon, volunteered to implement additional production cuts totalling 1.16 million barrels per day from May to December 2023. Furthermore, Russia extended its planned production cut by 500,000 barrels per day from March to June 2023 until December 2023. As a result, the total production reduction from May to December 2023 stands at 3.66 million barrels per day.
However, concerns about a global economic slowdown arose as major central banks, following the lead of the US Federal Reserve (Fed), raised their policy rates. This instability in the financial sector led to a crisis among medium-sized banks in the US, such as PacWest, Bancorp, and First Republic Bank (FRB), which is the 14th largest bank in the country. Additionally, negotiations between the Democrat Party and the Republican Party to raise the US debt ceiling (currently at $31.4 trillion) prolonged, raising the possibility of a government default on debt payments. Nonetheless, on June 3, 2023, US President Joe Biden signed legislation to raise the debt ceiling, enabling the US to resume issuing bonds until January 1, 2025. This move aimed to ensure the US can meet its debt obligations and avoid critical economic problems for both the US and global economy.
To boost prices, OPEC+ made collective efforts. During the meeting on June 4, 2023, a resolution was passed to extend the crude oil production reduction of 3.66 million barrels per day from the end of 2023 to the end of 2024. Moreover, the baseline production will be further reduced by 1.4 million barrels per day to reach 40.46 million barrels per day from January 1 to December 31, 2024. In July 2023, Saudi Energy Minister, Prince Abdulaziz bin Salman AI Saud announced voluntary crude oil production cuts of 1 million barrels per day, reducing the daily output to 9 million barrels per day in July and August 2023, in order to maintain oil prices within the range of $70-80 per barrel. The Saudi Energy Minister also emphasised that Saudi Arabia will closely monitor market conditions and may consider extending the aforementioned measures in the coming months based on market conditions. There are still risks and a possibility that the US and European economies, including China's economy, could experience slower growth than anticipated in the second half of 2023. Saudi Arabia stands ready to respond promptly due to its voluntary production cuts.
Global oil demand is projected to continue growing throughout the remainder of 2023. The International Energy Agency (IEA) estimates that global oil demand in 2023 will increase by 2.21 million barrels per day compared to the previous year, reaching 102.01 million barrels per day (an increase of 70,000 barrels per day from the April 2023 forecast). This growth is attributed to China lifting its strict Covid-19 control and prevention measures and fully reopening the country on January 8, 2023, which led to a surge in crude oil imports. According to the Chinese customs agency, crude oil imports in May 2023 rose by 17.4% from the previous month, reaching 12.1 million barrels per day.
Several factors support the global oil market growth. The US travel season, which begins on Memorial Day (May 29, 2023) and ends on Labor Day (September 4, 2023), is expected to increase domestic oil demand. The Energy Information Administration (EIA) anticipates a busier travel and road trip season in the US in 2023 compared to the previous year.
Furthermore, the United States Department of Energy (DOE) has announced a contract to supply crude oil to the Strategic Petroleum Reserve (SPR) from five companies, totalling 3.1 million barrels. The delivery is scheduled for August 2023 at an average price of $73 per barrel, which is lower than the average price of $95 per barrel in 2022.
Another factor to consider is the upcoming hurricane season in the Atlantic Ocean, which occurs from June 1 to November 30, 2023. The National Oceanic and Atmospheric Administration (NOAA) of the United States predicts that there will be 12-17 storms in 2023, with 5-9 of them potentially escalating into hurricanes and 1-4 becoming more severe and intense hurricanes (with wind speeds of 178 kilometres per hour). These weather conditions could disrupt oil supply in the Gulf of Mexico region.
The International Market Analysis Team, International Trading Business Unit, PTT Public Company Limited foresees a recovery in oil prices during the second half of 2023. Their prediction suggests that ICE Brent crude oil prices will fluctuate between $75 and $85 per barrel, driven by the anticipated rebound of the global economy. The team highlights that global central banks have revised their forecast for the global economic growth rate (GDP) in 2023 to +2.1%, an increase from the previous projection of +1.6% in January 2023. They also emphasise that China's oil demand recovery and the OPEC+ group's production reduction policy will contribute to tighter supply in the oil market.
However, there are several factors that could exert downward pressure on crude oil prices and require close monitoring. One such factor is whether OPEC+ will effectively implement the announced oil supply reduction policy. Additionally, concerns persist regarding economic conditions in various regions, including the US and Europe, where potential slowdowns or recessions may occur due to the increase in policy rates by central banks, leading to elevated economic costs.
This analysis is provided by the International Market Analysis Team within the International Trading Business Unit of PTT Public Company Limited.
