The International Energy Agency expects oil demand to rise to a record 101.7 million barrels per day in 2023 with China accounting for half of the projected increase. The IEA’s January Oil Market Report indicated this will lead to a tighter market in the latter part of the year as Western sanctions that came into effect in early December 2022 take hold.

OPEC, in its Monthly Oil Market Report, also expects healthy demand growth in China and a decline in Russian oil exports. But the two organizations differ on the projected volumes on both the demand and supply sides. This is because of uncertainty as to the speed of the recovery in China and the impact of European Union and G-7 sanctions on Russian oil exports, both of which reflect aspects of the succession of shocks that buffeted the global economy, first with the onset of the coronavirus pandemic in 2020 and then the February 2022 Russian invasion of Ukraine. OPEC and the IEA are aligned in their projections for overall global demand, though they diverge on the strength of Chinese demand growth. OPEC sees global demand rising to 101.8 mb/d, an increase of 2.2 mb/d over 2022.

Both organizations cited uncertainties relating to China and Russia in presenting their forward-looking projections. OPEC’s January report noted, “This forecast is subject to many uncertainties, including global economic developments, shifts in COVID-19 policies, and ongoing geopolitical tensions.” The IEA noted that, “Two wild cards dominate the 2023 oil market outlook: Russia and China. This year could see demand rise by 1.9 mb/d to 101.7 mb/d, the highest ever, tightening the balances as Russian supply slows under the full impact of sanctions.”

China will account for half of this demand growth despite uncertainty over the “shape and speed of its reopening” it added. This led the IEA to revise up its estimate for Chinese demand by 40,000 b/d to 850,000 b/d, a more bullish estimate than OPEC’s projection of 510,000 b/d.

The IEA’s executive director, Fatih Birol, said in an interview with Bloomberg television in Davos on the sidelines of the World Economic Forum that China presented the biggest uncertainty. “When I look at the markets, this year, 2023, there are many, many uncertainties. But if you ask me, which is the biggest uncertainty, I would say it is China … last year, 2022, for the first time since 40 years, Chinese oil and gas demand declined. … This year, the Chinese economy is reopening … and if Chinese demand for oil is strong, it will put upward pressure on prices.”

The initial surge in demand was expected to come during celebrations to mark the Chinese New Year, which fell on January 22 and is traditionally a time when millions of Chinese travel to visit family and friends. Beijing’s “zero-Covid” policy had led to a slowdown in the world’s second-largest economy as mobility was restricted and industrial activity declined in 2022.

The easing of these restrictions is expected to lead to a rebound in demand for transportation fuels, particularly for jet fuel, which the IEA noted will be the largest source of demand growth globally, rising by 840,000 b/d in 2023. However, it sees demand for road transportation fuels declining by a roughly similar volume of around 900,000 b/d because of “energy efficiency gains and booming sales of electric vehicles.”

China is likely to turn to Russia, which has been selling its oil at a discount, for additional supplies, having provided a lifeline to Moscow as European refiners turned away from Russian crude oil even before the EU ban came into force. This allowed Russia to maintain crude oil exports in 2022 as China and India absorbed the surplus oil that was selling at up to a discount of $40 per barrel to global benchmark North Sea Brent. After declining by 200,000 b/d in early December as the market grappled with the terms of a G-7 imposed price cap on Russian oil, exports rebounded slightly. This, the IEA mentioned, underscored “the high degree of uncertainty for the outlook.”

The price cap, which came into force in conjunction with the EU ban on Russian oil imports, was designed to keep Russian oil flowing to markets but at below market prices, thereby preventing Moscow from building a war chest with which to prosecute its war in Ukraine through lower oil revenue. The price cap was set at $60/bbl, more than $28/bbl below the Brent price on January 23.

Oil prices, which slumped by around $7/bbl at the start of the year as concern over a supply shortage subsided, rose to their highest level since December 1, largely on optimism of a pickup in Chinese demand.

However, the full impact of the embargo and the price cap has yet to play out and both the IEA and OPEC expect global oil supply growth to fall off, largely because of a drop in Russian output. The IEA expects a 1 mb/d contraction in oil supply growth in 2023 following the growth in 2022 of 4.7 mb/d as the OPEC+ alliance of OPEC and non-OPEC producers, led by Saudi Arabia and Russia, restored production to pre-coronavirus levels. Supply growth of 1.9 mb/d, mainly from the United States and other non-OPEC+ producers, will be tempered by an OPEC+ drop of 870,000 b/d, due to expected declines in Russia, the IEA projected. While the IEA sees Russian oil supply falling by 790,000 b/d, OPEC expects a higher slump of 950,000 b/d. Additional supplies are expected from Canada, Brazil, and Guyana.

These supply and demand dynamics are likely to inform OPEC+ ministers when they meet again on June 4 to decide whether to uphold quotas agreed to in October 2022 or make a further adjustment. The 23-member alliance sprang a surprise when it slashed quotas by 2 mb/d beginning in November after oil prices fell sharply on signs of demand weakness in the second half of the year. Under the agreement, the lower quotas are to remain in place until the end of 2023.

The IEA suggested a well-balanced market in the first half of the current year “could quickly tighten” as the Western sanctions affect Russian exports. Another set of EU sanctions banning the importation of Russian refined oil products is due to come into effect February 5 and may cause further market disruption and redirection of barrels.

The IEA sees the diesel market as most at risk as demand growth recovers. Russia exported a record 1.2 mb/d of diesel in December 2022, 60% of which went to the EU. The Middle East, where new refining capacity came online in 2022, and China, where refinery export quotas have recently increased, are expected to boost refined product exports but not fully make up for the loss of Russian supplies.

Russian crude oil production held steady in 2022 though the IEA expects some 1.6 mb/d to be shut in, taking total production down to an average 9.7 mb/d in 2023, a 1.3 mb/d year-on-year decline.

Oil prices soared to a near record $130/bbl shortly after the February 24, 2022 Russian invasion of Ukraine over fears of a steeper decline in Russian output at a time when the global economy was emerging from the coronavirus-induced slump. The energy complex as a whole was shaken with gas and electricity prices rising to a record as Russia curtailed and shut off nearly all pipeline gas flows to Europe.

As prices rose, demand fell, which then caused a drop in oil prices, prompting the OPEC+ producers to agree to a reduction of 2 mb/d in their overall ceiling starting in November 2022, though a number of producers have been producing below target even after the reduction. According to the latest S&P Global Platts survey of OPEC+ production in December, the 19 members party to the quota regime were still 1.8 mb/d below their collective target.

If the forecasts for Russian production declines prove correct, the market is expected to tighten in the second half of 2023. However, the extent to which it will tighten will also be contingent upon U.S. oil output. The IEA and OPEC both expect U.S. production to rise, but OPEC, in its report, was not as optimistic regarding U.S. output.

The main drivers of liquids supply growth are expected to be the United States, Norway, Brazil, Canada, Kazakhstan, and Guyana, while declines are forecast in Russia and Mexico, OPEC stated. “Nonetheless, large uncertainties remain over the impact of geopolitical developments, as well as expectations for US shale output in 2023,” it added.

Birol told Bloomberg TV that, aside from uncertainty over Chinese demand, policies adopted by the oil producing countries would have an impact on market dynamics. He told CNBC in a separate interview also in Davos that if the Chinese economy rebounds gradually, oil demand would rise by 1.8 mb/d to 1.9 mb/d. The IEA sees overall supply rising to 101.1 mb/d in 2023 against demand of 101.7 mb/d. Birol said there was sufficient supply, but much would depend on how the OPEC+ countries respond. “I don’t believe that availability of supply will be normally a major problem. Of course, it is very important here what kind of policies the OPEC+ countries will follow in the next months to come, and I personally hope that they will take a responsible position,” Birol said.

The decision by OPEC+ to reduce output during an energy crisis angered Washington, which had been lobbying Saudi Arabia for more supply. Riyadh has not condemned Russia’s invasion of Ukraine and has taken care to maintain its alliance with Moscow, which it views as a key partner in oil market management. Riyadh also feels vindicated as oil prices did not spike after the November 2022 supply cut.

Saudi climate envoy Adel al-Jubeir was asked by CNBC in Davos if the reduction decision had been the right one. “It’s absolutely correct. We saw an overhang of oil. We saw a possibility of markets crashing … We saw an overhang. All the data pointed to this, and we took action to ensure that we can maintain market stability. And since that decision was made, the price of oil has actually trended down in a moderate fashion,” he said. “This is the best and the biggest proof that the kingdom’s assessment was correct,” he added.

The Ukraine crisis and its impact on the energy market and the global economy has been a wake-up call that experts believe will accelerate the transition to cleaner energy sources. Birol, speaking on an energy panel in Davos, said the war in Ukraine had created the first “global energy crisis,” the depth and extent of which the world had never before seen. This gave a big boost to clean energy deployment. In 2022, renewable energy grew by an unprecedented 25% over the previous year. In 2019, only three out of 100 cars sold were electric, but in 2022, 13% of cars sold were electric, Birol said. “If this trend continues … in 2030, every second car sold in Europe, the U.S., and China … will be an electric car.”

With the war in Ukraine about to enter its second year, Saudi Arabia and its Gulf allies, their coffers padded with record revenue from 2022 oil exports, are not likely to heed calls to reduce or increase production if such policies run counter to their interests as long as demand for Middle Eastern oil holds.