OPEC+ continues to cut supply but mixed signals on demand are leaving markets hesitant, according to Bjarne Schieldrop, chief commodity analyst at SEB. As demand soars in China and India and jet fuel continues to recover post Covid-19, macroeconomic headwinds in Europe and the US complicate the outlook.

“We predict total demand is set to rise by 2 m b/d YoY in 2023 to 101.9 m b/d, with 90% of the demand growth from non-OECD countries. Jet fuel demand will account for 57% of demand growth as global aviation continues to normalize post Covid-19. Non-OPEC+ supply for 2023 was revised up by 0.1 m b/d. Call-on-OPEC 2023 was reduced by 0.2 m b/d as a result to 29.5 m b/d. Call-on-OPEC was 28.8 m b/d in Q4-22. The group produced 28.94 m b/d in Mar (Argus).

“As demand rises, the world will need more oil from OPEC. Call-on-OPEC is set to rise 1.6 m b/d from Q4-22 to Q4-23. The IEA is forecasting a call-on-OPEC in Q4-23 of 30.4 m b/d. The world will thus need 1.6 m b/d more oil from OPEC YoY in Q4-23 and 0.46 m b/d more than it produced in March. Contrary to this, the OPEC group decided to cut production by 1 m b/d from May to the end of the year. So from May onward the group will produce around 28 m b/d while call-on-OPEC will be 29.1 m b/d, 30.3 m b/d and 30.4 m b/d in Q2, Q3, and Q4-23.

“If the IEA is right about demand then the coming OPEC cuts should drive inventories significantly lower and oil prices higher. But the market doesn't quite seem to buy into this outlook. If it had then prices would have moved higher. Prices bumped up to USD 87.49/b intraday on 12 April but have since fallen back. Net-long specs have rallied 137 m b to 509 m b since the recent cuts were announced.

“The darkening clouds on the macro-sky are concerning investors. There are significant weakening signals in global diesel demand along with falling manufacturing PMIs. Historically, recessions lead to a cyclical trough in manufacturing activity, softer diesel demand and falling oil prices. So investors are cautious about buying into the bull-story based on OPEC cuts alone.

“However, cross-currents are making demand growth hard to assess. The circumstances are much more complicated than in previous recession cycles because global jet fuel demand is recovering post Covid-19 and following Chinas recent reopening. Secondly manufacturing PMIs in China and India are rising while OECD PMIs are falling."