OPEC Predicts Slowing Demand in 2023, But Could Supply Squeeze Continue?

If OPEC's expectations for demand hold true, the 13-member exporting group will need to add more than 3 million B/D to the market by the end of next year.

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OPEC said it expects global oil demand to grow year over year by 2.7 million B/D, or 2.7%, to reach 103 million B/D in 2023. This compares with OPEC’s stronger growth forecast of nearly 3.4 million B/D for 2022.

The figures come from OPEC’s latest monthly report which is being scrutinized since it is the first to include a market forecast for 2023. OPEC released its report amid a recent downward trend in oil prices that saw both Brent crude and West Texas Intermediate futures trade below $100/bbl on Tuesday.

One of the factors weighing on OPEC’s numbers is its outlook for economic growth, which at 3.5% for 2022 remains unchanged from the previous month’s assessment. In 2023, however, OPEC is forecasting economic growth to reach just 3.2%.

Despite an impending slowdown, OPEC said it sees demand being propped up next year “by a still solid economic performance in major consuming countries, as well as improved geopolitical developments, and containment of COVID-19 in China.”

The group said its expectations also assume that the Russia-Ukraine war will not unravel further and cause “major spillover effects on other economies” beyond what has already happened.

OPEC considers China, which is the world’s largest energy importer, to be on track to see oil demand grow by 700,000 B/D next year as the country relaxes recently imposed lockdown measures.

While the OPEC report highlights that risks to demand "are skewed to the downside," it is nevertheless more optimistic in its outlook than the International Energy Agency which last week predicted that global oil demand will rise by just 2.2 million B/D in 2023.

Can OPEC Balance Markets Next Year?

OPEC said it sees non-OPEC crude production growing by 1.7 million B/D in 2023 to an average of 67.4 million B/D. This is down from a non-OPEC supply rise of 2.15 million B/D projected this year.

US producers are expected to represent the bulk of the non-OPEC growth with an additional 1.1 million B/D, most of which will come from the prolific tight-oil formations in the Permian Basin. Non-OPEC countries expected to trail the US in adding extra barrels to the market include Brazil, Norway, and Guyana.

Albeit at a slower pace, OPEC said US production should continue rising throughout 2023 if current levels of drilling activity are maintained and as supply chain issues in the biggest tight-oil basins smooth out. However, OPEC is not optimistic that the US can overachieve and cited uncertainty with regards to unspecified “operational aspects of US production.”

What this means to OPEC is that to balance global crude markets, its 13 member nations will need to pump a combined average of 30.1 million B/D of crude in 2023. That translates to a 900,000 B/D increase above OPEC’s expected average output this year.

But OPEC’s challenge is actually steeper than these numbers suggest. In June, OPEC reported a total output of 28.7 million B/D while its demand projection for the fourth quarter of 2023 tops 32 million B/D. That means OPEC needs to add more than 3 million B/D to the market over the next 18 months.

Though the June figure represents a monthly increase of 234,000 B/D, OPEC continues to miss its own production targets. The latest tally puts the group more than 1 million B/D below its production quota of about 25.8 million B/D. (Members that are excluded from quotas are Iran, Libya, and Venezuela.)

The biggest single increase in monthly output came from Saudi Arabia which added 159,000 B/D to reach a total of more than 10.5 million B/D for June. Other countries that added production were the UAE, Iran, Kuwait, and Angola. Production decreased in Equatorial Guinea, Congo, Venezuela, and Libya.

The apparent inability of OPEC to meet past production quotas has fueled skepticism over the cartel’s spare capacity.

The US Energy Information Administration said in its latest energy outlook released last month that OPEC's surplus capacity declined from 5.4 million B/D in 2021 to just 3 million B/D as of May 2022.

Meanwhile, energy market research firm Enverus said in a report it published earlier this week that “OPEC spare capacity appears to have almost entirely eroded as oil production by the group has ramped higher over the last year.”

There is also the question over the spare capacity of OPEC+, which is the wider 23-country alliance that includes non-OPEC nations such as Russia. While OPEC+ has moved to reverse the historic cuts made in 2020, the group has been unable to meet its quotas this year.

As of April, OPEC+ was some 2.6 million B/D short of its monthly quota of nearly 41.7 million B/D.

Analysts with the global investment bank UBS said this month that they expect OPEC+ to meet only about half of its 648,000 B/D increase set for August and that the group’s spare crude capacity will shrink below 2 million B/D by this time.