Oil price still to average more than US$80/barrel in 2023

王烜

What's happened?

On December 13th the price of crude oil (dated Brent Blend) again rose above US$80/barrel, after falling to 12-month lows of about US$75/b earlier in the month. China's easing of its zero-covid policy played a role in the recent rises. Prices have eased again slightly, but we still expect oil to trade at more than US$80/barrel on average in 2023, especially as global production declines from its recent peak.

Why does it matter?

The global oil market has moved into a sizeable surplus in the fourth quarter of 2022, putting downward pressure on prices, with Brent prices falling by more than 20% between early November and early December. The surplus occurred as OPEC+ production cuts announced in October took time to take effect and US production continued to expand. Russia's production also remained high ahead of the EU ban on seaborne imports of Russian crude, which went into effect on December 5th.

We expect the global oil market to fall back into deficit in early 2023 as Russia's production drops and OPEC cuts kick in, putting renewed upward pressure on prices in the short term. Despite recessions in the US and most European economies, these supply constraints will put a floor under the oil price of about US$80/b in the medium term.

Both downside and upside risks loom large over oil price forecasts in 2023. To the downside, the previous steep rise in global prices of oil and gas is contributing to a sharp slowdown in energy demand in many OECD markets. Oil traders are still concerned about recession risks, but less so since China is reopening earlier and faster than previously expected. On the upside, we expect the EU ban on Russian crude (and Russian oil products from February 2023) to put upward pressure on prices. The ban also prohibits EU- and UK-based insurers, financiers and shipowners from handling shipments of Russian crude regardless of destination, and through the recent G7-brokered price cap extends to the rest of the G7 and Australia. We expect Russian production to fall by 2m barrels/day. When OPEC's de facto cuts are added, a total of 3m b/d will be removed from the market.

What next?

We were previously expecting oil prices to average US$84.3/b in 2023 and are in the process of revising this forecast upwards, to more than US$85/b. However, we also expect prices to remain quite volatile, with swings below US$80/b and above US$90/b quite likely.