But restrictions on Russian oil exports are tightening further, with the European Union ban on refined products coming into force next week. In our view, oil appears to have reached an inflection point. Brent is already up around 13.5% from its low point in early January to USD 88.5 a barrel at the time of writing. As global demand picks up and further curbs on Russian exports kick in, we expect Brent to rise above USD 100/bbl over the coming months.
Russian output looks set to fall as Europe imposes more curbs. So far, Russian oil exports have held up relatively well, despite the European Union’s ban on crude imports in December. Russia has been able to find enough buyers to compensate for most of the missing European demand. This was illustrated by an increase in seaborne exports by more than 500,000 barrels a day so far in January. Part of this increase is due to the redirection of flows exported previously via pipeline to Germany and Poland. Hence, total crude exports rose less, nearly 190,000 barrels per day month-over-month in the first 16 days of 2023.
But Russian exports are still lower than prior to the EU crude ban, following a drop of 265,000bpd in December. In addition, with the EU ban on refined products set to take effect on 5 February, we think Russia will find it increasingly challenging to make up for the European shortfall. A lack of adequate smaller tankers may make it more difficult for Russia to divert refined products to other markets. There is also a limit to how much additional crude China and India can absorb, in our view. As a result, we expect Russian crude production to fall below 9mbpd during 2023 from levels above 10mbpd at the start of 2022 and 9.77mbpd in December.
China’s early reopening should boost global energy demand growth as mobility picks up. We expect two-thirds of oil demand growth this year to come from emerging Asia, led by China’s reopening. Mobility data during the first four days of China’s Lunar New Year are already showing signs of recovery. According to the Ministry of Transport, nearly 96 million people traveled via railways, planes, and ships during the four days, up from 74.4 million in the same period last year. Trip.com data showed that bookings of hotel rooms and tourism spot tickets exceeded levels of 2022 and 2019.
Although we expect China’s reopening to be bumpy due to an initial rise in infections, we expect a recovery in consumption and activity from as early as February, picking up pace from the second quarter onward. The IEA said earlier this month that China's reopening is set to boost global oil demand to record highs this year despite the possibility of mild recessions in Europe and the US. We expect China's GDP growth to recover to around 5% in 2023 from 3% last year, and we expect the reopening to lift global oil demand to above 103mbpd in the second half of 2023.
Modest supply growth, underinvestment, and low inventories will add to market tightness. We expect only modest supply growth in non-OPEC+ countries in 2023, adding 1.3mbpd supported primarily by US oil production, but trailing oil demand growth of 1.6mbpd this year. Underinvestment in the exploration and development of new oil supply, capital discipline, and high inflation are slowing down the supply expansion. We expect the oil market to again be dependent on more oil from OPEC+.
So, we continue to expect Brent to rise to USD 110/bbl and WTI to USD 107/bbl this year. We reiterate our advice for risk-taking investors to add long exposure via first-generation indexes or longer-dated Brent contracts or to sell Brent’s downside price risks.
Main contributors - Mark Haefele, Giovanni Staunovo, Patricia Lui, Vincent Heaney, Daisy Tseng
Content is a product of the Chief Investment Office (CIO).
Original report - Oil prices set to rise as Russian ban kicks in, China reopens, 27 January 2023.