Global Oil Market Grapples with Forecasts, Supply Shifts, and Banking Sector Uncertainty

Escalating costs have led to a deceleration in oil and gas production growth in the United States, with a deteriorating outlook, according to the latest edition of the Dallas Fed Energy Survey. The survey revealed that business activity in the oil and gas industry remained virtually unchanged in Q1 2023 compared to Q4 2022. Despite oil and gas production growth, this increase was more modest than the previous quarter. For the ninth consecutive quarter, respondents in the energy survey reported higher costs, indicating that inflation remains a significant issue in the oil sector. The breakeven price across the U.S. oil patch has risen from $34 per barrel in 2022 to $37, with the price range necessary for producers to cover their operating expenses at between $29 and $45 per barrel.

Heavy crude oil prices are experiencing a boost due to the startup of a new Chinese refinery operated by PetroChina. This refinery, originally designed to work with Venezuelan crude, will now utilize heavy crude from Colombia, Ecuador, and Canada for its operations. PetroChina has contracted at least 8 million barrels of heavy crude from these countries, set to load in April. As a result, Canada's Cold Lake heavy crude now trades at a discount of $11.50 to Brent crude, down from about $20 per barrel earlier this year. The end of the maintenance season in the United States and limited supply from Venezuela and Ecuador are also contributing to bullish factors for heavy crude prices.

Meanwhile, oil prices have been impacted by broader market concerns, such as the health of the global banking sector, the economy, and the Fed's interest rate policy. The collapse of Silicon Valley Bank more than two weeks ago triggered massive selloffs, with the oil market being an early victim of the sharp decline. Speculative liquidation of long positions in oil also contributed to the plunge in oil futures prices.

Brent crude futures fell 5 cents, or 0.1%, to $78.23 a barrel, while West Texas Intermediate crude rose 12 cents, or 0.2%, to $73.09 a barrel. This week, market sentiment began to improve as concerns about the banking system started to ease, allowing the market to shift focus to a supply concern from Iraq. A halt to 400,000-bpd of crude exports from the semi-autonomous region of Kurdistan drove prices higher. Major banks, including Barclays, ING, and Goldman Sachs, have reduced their oil price forecasts for 2023 but still anticipate oil prices to average more than $80 per barrel and even over $90 in 2023.

In conclusion, the global oil market is influenced by various factors, such as production costs, inflation, and geopolitical events. While heavy crude oil prices are experiencing a boost due to the startup of a new Chinese refinery and other bullish factors, the overall oil market will continue to be impacted by broader market concerns, including the health of the global banking sector and the economy.