The Global Recession Deepens: Oil Production Plunged In January

Less Production And Lower Prices Means Demand Is Cratering

In the midst of the ongoing dumpster fire in global banking, the global economy has to process two pieces of seriously bad news: 1) Oil prices went into freefall last week, and have yet to bounce back, and 2) Oil production declined in January for the third straight month.

Global crude oil production fell for a third consecutive month in January, by 365 kb/d to a seven-month low, driven by declines in Canada, Iraq, Russia, and Bahrain, according to the latest data from the Joint Organizations Data Initiative.

Crashing global prices and declining global production add up to declining global demand. “Declining global demand” is another term for “global recession”—which is getting deeper quicker.

The prevailing narrative on last Wednesday’s oil price crash was that it was fallout from the ongoing crisis in banking, and its potential for contagion.

Oil prices fell sharply Wednesday, as traders feared a brewing banking crisis could dent global economic growth.

However, even that narrative concedes that global demand is heading down, not up.

“The oil market is going to be stuck in a surplus for most of the first half of the year, but that should change as long as we don’t see a major policy mistake by the Fed that triggers a severe recession,” said Ed Moya, senior market analyst at Oanda. “Now near the mid-$60s, WTI crude’s plunge is at the mercy of how much worse the macro picture gets.”

A retest of October’s lows could add increased downward pressure on WTI crude, he said, adding that energy stocks may struggle given the weakening demand outlook and surplus likely to persist in the short-term.

While last Wednesday’s price drop was steep—around 5% for both West Texas Intermediate and Brent Crude—oil prices have been in steady decline ever since March 6.

Moreover, while oil markets have fluctuated, both Brent and West Texas Intermediate prices peaked last June, and the overarching trend since then has been down.

Following the Wednesday rout in oil prices, both Brent and WTI stabilized at significantly lower prices, and have yet to establish any clear trend either up or down.

The oil production data from the Joint Organizations Data Initiative (JODI) comes as a bit of a surprise, as in February the International Energy Association (IEA) assessed January production as holding steady at just over 100 million barrels per day.

World oil supply held largely steady in January, at around 100.8 mb/d. The pause comes after a sharp 1.2 mb/d decline at the end of 2022 led by the US and Saudi Arabia. We expect global output to grow 1.2 mb/d in 2023, driven by non-OPEC+. Supply from OPEC+ is projected to contract with Russia pressured by sanctions.

According to the IEA’s February report, oil demand should be growing globally.

At the same time, world oil demand growth is picking up after a marked slowdown in the second half of 2022 and a year-on-year contraction in the fourth quarter. China accounts for nearly half the 2 mb/d projected increase this year, with neighbouring countries also set to benefit after Beijing ditched its zero-Covid policies. A pronounced uptick in air traffic in recent weeks emphasises the central role of jet fuel deliveries in 2023 growth – expected to soar by 1.1 mb/d to reach 7.2 mb/d, around 90% of 2019 levels. Total demand will hit a record 101.9 mb/d, 1.4 mb/d more than the 2019 average. 

In its March report, the IEA assessed February production as increasing by 830 kb/d.

World oil supply leapt 830 kb/d in February to 101.5 mb/d as the US and Canada rebounded strongly from winter storms and other outages. We expect non-OPEC+ to drive global output growth of 1.6 mb/d this year, enough to meet demand in 1H23 but falling short in the second half when seasonal trends and China’s recovery are set to boost demand to record levels.

The IEA is optimistic on global oil demand (and says so, repeatedly), but the realities of oil prices suggest that oil demand is heading down, not up.

Another sign of weakening demand that the IEA noted. Inventories in OECD countries rose to an 18-month high.

Oversupply concerns remain, with the International Energy Agency stating that commercial oil stocks in developed OECD countries have hit an 18-month high. The agency also acknowledged that Russian production has remained steady near pre-war levels.

"Building stocks today will ease tensions as the market swings into deficit during the second half of the year when China is expected to drive world oil demand to record levels," the IEA added.

Rising supply suggests that oil-producing nations cannot sell all the oil they produce—a reality which would appear to confirm the thesis of weakening demand.

Last week’s oil selloff is likely particularly worrisome for Russia. Not only has Urals Crude retreated back below the $60 a barrel price cap, its price is at its lowest since December of 2020—over two years before Putin invaded Ukraine and incurred a wide array of sanctions intended to bring economic pressure to end the war.

Even Russia’s ESPO crude, which ships from ports on the Pacific, has followed this downward path.

At $63.97 a barrel, should ESPO crude fall another $4 it, too, will be beneath the price cap.

Another bad sign for Russia, as well as for the rest of the world: China’s oil imports declined in December, according to the International Energy Forum. January’s data for China was not available.

China (December data)

• Crude imports decreased by 55 kb/d to 11.35 mb/d.

• Demand decreased by 532 kb/d month-on-month to 14.87 mb/d.

• Product exports increased by 315 kb/d to 1.93 mb/d – the highest level since April 2020.

While December was the first month after the Zero COVID rules were ended, a 3.5% decline in demand does not augur well for Russia’s increasingly isolated oil export industry. Without China soaking up Russian oil demand Russia’s production will eventually decline.

If China is not importing oil its economic “reopening” is effectively not happening.

China’s oil imports for January and February won’t be known for another month yet, as China generally releases the data for January and February together, due to the extended national shutdown that is the Lunar New Year holiday. However, it is difficult to presume significant increases in oil imports with global oil prices in decline.

To illustrate just how deep the global recession is getting, it is worth remembering that the “experts” predicted oil would surge past $200 a barrel last year due to sanctions on Russia following Putin’s invasion of Ukraine.

Pierre Andurand, one of the sector’s best-known hedge fund managers, said supplies of Russian oil into Europe would disappear in the aftermath of Vladimir Putin’s invasion of Ukraine, leading to a lasting reshaping of global energy markets.

“Wakey, wakey. We are not going back to normal business in a few months,” he told the FT Commodities Global Summit in Lausanne. “I think we’re losing the Russian supply on the European side for ever.” Crude could even hit $250 barrel this year, double current levels, he said.

Last summer, as the price cap began to take shape, the $200 a barrel prediction was made anew, with the anticipation that the price cap would further constrain global oil supplies.

Schieldrop said the plan seems "neat on paper, but it sounds like a recipe for disaster right now."

He said strong demand and low supplies had handed producers such as Russia immense power in the market this year. And he said Russia could choose not to sell its oil if a price cap came into force.

Schieldrop said the plans could cause Russian production to fall by as much as 2 million barrels per day, which would ratchet up the pressure on an already-stressed oil market.

Both times, the predictions hinged on the premise of strong demand. That oil prices have since fallen suggests that demand might not be quite so strong, and even the IEA in their March report acknowledged that supply is currently outpacing demand.

A 52.9 mb January surge in global inventories lifted known stocks to nearly 7.8 billion barrels, their highest level since September 2021 and preliminary indicators for February suggest further builds. Despite solid Asian demand growth, the market has been in surplus for three straight quarters.

Analysts have just earlier this month predicted oil could reach $100 per barrel later this year—largely on the basis of “strong demand” from China.

It all comes down to China: The world’s second-biggest oil consumer is snapping up crude after reversing its strict Covid-19 policies. Against a backdrop of tight supply, the demand boost has everyone from Goldman Sachs Group Inc. to trading powerhouse Vitol Group predicting a rally to $100 a barrel later this year. 

“The demand from China is very strong,” Amin Nasser, CEO of Saudi Aramco — the world’s biggest oil company — said in a March 1 interview in Riyadh. 

While the second half of 2023 is still a long way off, and a booming recovery by China could easily bring these price predictions to fruition, at the present time the pricing signals are all moving in the opposite direction.

The signals are enough for Goldman Sachs, having long been bullish on oil prices, to retreat from its $100 per barrel prediction.

The bank’s analysts now see Brent reaching $94 a barrel for the 12 months ahead, and $97 a barrel in the second half of 2024, versus $100 a barrel previously.

“Oil prices have plunged despite the China demand boom given banking stress, recession fears, and an exodus of investor flows,” the bank said in a March 18 note. “Historically, after such scarring events, positioning and prices recover only gradually, especially long-dated prices.” 

As if to justify Goldman Sachs’ change of heart, yesterday morning oil opened the trading day by dropping sharply.

Oil prices fell on Monday to their lowest in 15 months on concerns risks in the global banking sector may cause a recession that would lead fuel demand to decline and ahead of a potential hike in U.S. interest rates this week.

China’s demand boom would appear to be not quite so booming, and the banking instability the world has seen over the past two weeks has dampened Goldman Sachs’ enthusiasm for oil.

A China recovery and even a global recovery is very much a future possibility. On the basis of present data, however, that future possibility is not a current probability. At present the global economy remains mired in a recession which is getting deeper. There may be a turning of the corner coming up, but the world is not there yet.