KUWAIT: Oil prices rallied for a third straight month in March, supported by tighter supplies, a resilient global economy and continued geopolitical uncertainty. Brent futures closed up 4.6 percent in March to $87.5/bbl (+13.6 percent ytd). Backwardation in the forward curve (where near-term prices exceed those for later deliveries) began widening again mid-month, a sign that markets perceived increased near-term supply tightness. Meanwhile, local marker Kuwait Export Crude (KEC) gained 5.5 percent in March to $86.3/bbl (+8.5 percent ytd).

Trading in Brent futures and options increased substantially in Q1, with ‘open interest’ rising to 2.3 million contracts as of March 19, its highest level in two and a half years. Sparked by OPEC’s extension and deepening of 2023’s production cuts, bullish positions have increased markedly, propelling net length—the difference between the number of ‘long’ contracts (speculating on oil prices rising) and the number of ‘short’ contracts (prices falling)—to its highest in almost a year (289k).

Oil demand growth forecasts for 2024 remain solid, albeit slowing from 2023. The International Energy Agency (IEA) in March again revised up its projection for oil demand growth, by 110 kb/d to 1.3 mb/d. The IEA cited an improved US economic outlook including a resilient labor market as the basis for its revision. Its forecast is still some way below OPEC’s bullish estimate of 2.25 mb/d, which the latter has maintained since mid-2023.OPEChas stood by its belief that oil demand will be robust on the back of growth momentum in non-OECD economies, while potential interest rate cuts by central banks later in the year should also support an improved global macroeconomic outlook.

On the supply side, combined data from OPEC secondary sources and S&P Global show aggregate OPEC+ crude production (quota members) largely unchanged in February at 34.42 mb/d (+10 kb/d m/m). Among OPEC-9 members, Nigeria recorded the largest monthly increase (+47 kb/d to 1.48 mb/d), followed by Saudi Arabia (+18 kb/d to 8.98 mb/d). OPEC-9 output gains were largely offset by declines among non-OPEC-9 countries, primarily South Sudan, which experienced an almost 50 percent reduction in output (-70 kb/d) due to a pipeline blockage.

Compliance with the latest round of OPEC+ cuts was weakest in Kazakhstan, which has yet to effect any cuts at all, and Iraq, whose crude output of 4.20 mb/d remained more than 200 kb/d above its quota. Among quota-exempt members, both Libya and Venezuela notched up output gains in February, of 144 kb/d to 1.17 mb/d and 16 kb/d to 0.82 mb/d, respectively. For Libya, this large increase came after production at the Sharara field was restarted, and for Venezuela, February’s gain was the fifth consecutive. Production in Iran, however, fell for the second month in a row (-15 kb/d to 3.15 mb/d).

In terms of the impact of OPEC’s production cuts on oil market balances, the effect has been to flip the market from a surplus in Q4 2023 to a deficit in Q1 2024. Aggregate OPEC-12 output in Q1has so far averaged 26.47 mb/d, well below the 26.92 mb/d the IEA estimates the group needs to supply to balance the market. Using the IEA’s oil demand and non-OPEC supply estimates, a supply deficit of 0.45 mb/d opened up in Q1. For the rest of the year, the IEA has extrapolated the impact on market balances of a base case scenario in which OPEC+ cuts are extended beyond Q2 to end-2024. It sees deficits in every quarter of the year and by as much as 0.72 mb/d in Q3. OPEC+ will decide on any extension or unwinding of its 2.1 mb/d of cuts in June. (Chart 4.)

In Kuwait, a record volume of refined petroleum products was produced in January. According to official data released through the Joint Organizations Data Initiative (JODI), this reached 1.20 mb/d, helped by the ramping up of operations at the Al-Zour refinery. (Chart 5.) Product exports, the largest of which by volume consist of gasoil/diesel, kerosene and naphtha, surged to their highest level, 1.02 mb/d, since 2009. At this rate, average product export volumes in 2024 should surpass last year’s high of 0.96 mb/d and translate into export revenues in excess of the record $25 billion generated in 2023.

That said, these refined product gains have come at the expense of crude exports, which according to January’s figure of 1.24 mb/d, look to have fallen to their lowest level in more than twenty years. With Kuwait’s crude production capped by OPEC+ policy, to tap into the higher value product exports, such as distillates, KPC has had to divert crude volumes destined for exports to the local refinery for processing into products. The trade-off has been worth it in terms of export revenues.

In the US, crude oil output fell slightly to 13.1 mb/d in March from the record 13.3 mb/d seen in Jan/Feb—but in line with the US Energy Information Administration’s (EIA) average output projection for 2024. Crude stocks in the US Strategic Petroleum Reserves continued to increase in March: by the 21st of the month, they were up more than 8.6 mb in 2024 to 363.05 mb, reflecting the Department of Energy’s aggressive crude repurchase program, which has been helped by its decision to raise its target price to +$79/bbl from $65-72/bbl last year.

The outlook for oil prices has improved compared to the start of the year. While the global economy has demonstrated resilience, carrying with it better-than-expected oil consumption, it is largely due to OPEC+ supply cuts that the market has tightened—and looks likely to remain tight throughout 2024. Speculator interest has turned more bullish, with the balance of price risks shifting to the upside while OPEC+ restrains output. Downside risks, from robust non-OPEC/US supply and a de-escalation in global geopolitical tensions to a potentially underperforming global economy or an aggressive unwinding of the OPEC+ cuts in July, remain present, however. We see Brent averaging around $85/bbl in 2024.