OPEC Forecast Runs Into a U.S. Inflation Problem

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Seemingly betting the lot on China, economists at the Organization of the Petroleum Exporting Countries (OPEC) said they expected a tighter market for 2023, with risks coming from uncertainty over the future direction of shale. But with inflation a top concern, the overall outlook may be bit more balanced than expected.

Economists at OPEC said they expected the world economy to expand by 2.6% this year, driven in large part by the economies of Asia. The U.S. economy, the world's largest, is expected to expand by 1.2% this year, while China's economy grows by 5.2% and India's by 5.6% for the year.

"While principally the current economic momentum provides a good base for this year's growth, a slowing dynamic for the year is still likely with inflation remaining high and further lifts in key interest rates, particularly in the Euro-zone," they wrote in their monthly market report for February. "The world economy will continue to navigate through numerous challenges including high sovereign debt levels in many regions and geopolitical developments."

Despite the uncertainty, OPEC raised its forecast for global demand growth by 100,000 barrels per day (BBL/d) for an annual average of 101.87 million BBL/d, its first upward revision in six months. While OPEC production is constrained by a quota system, the forecast for non-OPEC production was revised lower by 100,000 BBL/d to 1.4 million BBL/d.

On new supplies, OPEC cut both ways. The main drivers of the expected increase in non-OPEC production were the United States, Brazil, Canada, Guyana and Kazakhstan, with declines coming from Russia and Mexico.

"Nevertheless, large uncertainties remain over the impact of ongoing geopolitical developments, as well as U.S. shale output in 2023," OPEC economists wrote.

Upstream, OPEC sees headwinds from inflation and lingering supply-chain issues. A late December freeze led to outages in the premier Bakken and Permian shale formations and labor remains an issue for exploration and production.

That mood was reflected in the latest survey from the Federal Reserve Bank of Dallas.

"Labor is an issue that is affecting our firm," a respondent said. "The government can remove all regulations and timetables, and the amount of increase in activity would not be affected by more than 10%. Automation cannot drill wells, move rigs and build locations."

Nevertheless, U.S. crude oil production is on pace to set a record this year, labor issues or not. The federal government is forecasting an average production rate of 12.49 million BBL/d for 2023 and 12.65 million BBL/d for next year.

The pace of growth is slowing year-on-year, however. This year's production should represent an increase of 4.9% from 2022 levels, but growth only increases by 1.3% next year.

On prices, OPEC said Brent was in backwardation due to improved demand prospects, "specifically from China." But even as it frets over future supplies, economists said the chances for a major rally in crude oil prices were capped by signs of a well-supplied market, particularly in the U.S. economy.

Data for the seven-day period ending Feb. 7 showed total U.S. commercial crude oil inventories increased by 7.5 million barrels. On Tuesday, the American Petroleum Institute said it expected to see crude oil stocks jump by 10.5 million barrels.

"Simply put, the U.S. is swimming in oil," analysts at London oil broker PVM wrote.

Meanwhile, the word on the health of the U.S. economy was mixed. Consumer-level inflation declined for the seventh-straight month to January, but from December to January, inflation increased by 0.5%, compared with 0.1% between November and December.

Groceries, rents and, of course energy, were behind the January increase in consumer prices, but consumers are either unfazed or depleting their savings. U.S. retail sales last month increased by 3%, beating the 1.8% forecast.

Along with a major spike in new hires last month, that suggests a U.S. Federal Reserve trying for a soft landing on its fight against inflation is far from over. Borrowing costs will need to increase even further to dampen demand and bring inflation to the 2% target rate.

For OPEC economists, downside risks include the war in Ukraine and a fragile real estate sector in China.

"Also, the effects of China's rebound, as a result from the reopening efforts, could lead to more sustained global inflation, causing continued monetary tightening actions," economists wrote. "In addition, very high global debt levels, in particularly those related to sovereign debt, but also in the private sectors of various economies could impact the growth dynamic."

Several major banks are still forecasting a return to $100 crude oil. But perhaps, given the looming uncertainty about the overall health of the global economy, the U.S. Energy Information Administration's forecast for $85-something Brent makes more sense for now.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).