Oil prices are likely to increase throughout the year
Oil prices in 2023 will likely average US$ 88 (Brent crude), lower than the US$ 97 seen in 2022 but still high by historical standards. Over the year, prices will likely see considerable volatility due to concerns around supply and the uncertainty around the global economic outlook. At the consumer level, lower prices at the pump will provide a welcome relief when it comes to inflation, but any sudden increase in oil prices will swiftly filter through to consumers and further pressure disposable income. In major oil producing and exporting countries, high oil prices will continue to support additional fiscal measures or the expansion of sovereign wealth funds.
- Oil prices in Q1 2023 fell far below the highs reached in 2022, in large part due to recession fears and the turmoil in the banking sector: spot prices for Brent crude reached the low 70s in March. This provided an important reprieve in terms of inflationary pressures globally.
- However, supply side developments, notably output cuts from OPEC and Russia, and a slightly improved global demand outlook point to a gradual increase in oil prices throughout the course of 2023.
- FrontierView’s forecast for Brent crude is US$ 88 for 2023.
Our View – Demand
The ongoing economic slowdown in major markets, notably the US and the EU, will weigh on the demand for oil. Despite a stronger-than-expected start to the year, the American economy will likely contract at some point in H2 as high interest rates take a toll on investment and inflation dents consumers’ purchasing power. In Europe, demand for oil will also fall due to slower economic activity, but be supported by several factors, notably a rebound in tourism in the summer, and the continuation of the energy crisis, which will continue to drive a switch to petroleum-based fuels.
The recovery of the Chinese economy following the abrupt end of its zero-COVID policy will be a major factor guiding oil prices this year. In anticipation of the recovery, the Chinese government increased its oil import quotas by 20% (YOY). While stronger-than-expected Q1 data points to a large increase in economic activity, oil consumption will not necessarily follow; in China, the recovery will be driven more by consumer spending on services than by sectors that have fueled the economy in the past and are more fuel-intensive, such as construction activity or goods manufacturing. Still, Chinese demand for oil will be an important source of upward pressure on oil prices in 2023.
2023 will be a year of recovery for air travel, with total passenger kilometers set to reach 2019 levels. The industry will be helped by China’s reopening, where demand for domestic flights spiked after the relaxation of COVID rules. China’s reopening should also boost air travel activity in Southeast Asia and other major tourist destinations. Meanwhile, easing labor supply shortages in airports globally should help airlines avoid the operational disruptions seen in the last two years. While inflation and the economic slowdown will weigh to a certain extent on demand for air travel, the fact that it is usually undertaken by wealthier, more resilient segments of society will keep demand for air travel, and therefore jet fuel, high.
Our View – Supply
As FrontierView expected, OPEC reacted to low prices in Q1 by announcing production cuts: the organiZation’s reduction in output totals around 1.16 million bpd (500,000 from Saudi Arabia). The announcement caused oil prices to rise by almost 8%, highlighting uncertainty around global supply. The cuts, which will begin in May, are set to last throughout 2023, providing a price floor; however, OPEC will remain responsive to potential swings in prices and has the ability to further cut output or, on the contrary, introduce more oil into the market should it need to.
In retaliation to Western sanctions, and in an attempt to assess the impact of its own cuts on oil prices, Russia also announced a reduction in output of 500,000 bpd in March; the figure later increased to 700,000 bpd. While the move has had a limited impact on prices, it still represents a sizable chunk of oil taken off of markets. Looking forward, it is unlikely that Russia will return to levels of output seen in recent years, as sanctions hamper the country’s ability to maintain its infrastructure.
In 2022, the release of 180 million barrels from the US’s Strategic Petroleum Reserves (SPRs) was an important source of downward pressure on oil prices. However, US President Joe Biden’s administration recently announced that, after withdrawing a further 26 million barrels, it would hold off on further releases for the remainder of 2023. The administration has also stated its intention to rebuild the stockpile of crude, if and when prices reach around US$ 70 a barrel.
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