However, tight supply will keep a floor under prices in 2023 and 2024
Oil prices have seen a meaningful improvement from the sky-high levels seen in 2022, but they remain relatively high by historical standards. Still, in year-on-year terms, oil prices are an important driver of falling inflation, which will help consumer spending at the global level. Given that they are likely to pick up in H2 2023, MNCs should make the most of current prices to lock in favorable contracts. MNCs should also pay close attention to events that could push prices up, such as rate cuts from major central banks, a pickup in Chinese growth, or larger-than-expected production cuts from major oil exporters.
Overview
- Oil supply remains very tight in 2023: OPEC, led by Saudi Arabia, has implemented several output cuts in 2023, totaling between 2 million and 3 million barrels per day (bpd), while Russia has also reduced its own output by 500,000–700,000 bpd.
- Despite this, oil prices have remained relatively muted in the first half of 2023, especially when compared to the levels they reached in 2022.
- Much of that has to do with negative sentiment around the global macroeconomic outlook, which is leading to low demand and short-selling.
- China’s recovery is also proving to be “light on fuel,” as consumers prioritize spending on services rather than goods, and property sector growth remains sluggish.
- FrontierView expects oil prices (Brent crude) to average US$ 84 in 2023 and US$ 81 in 2024.
Our View
Oil prices have confounded expectations in H1 2023; given tight supply and stronger-than-expected economic activity in major markets such as Europe and the US, they have fluctuated around the US$ 80 mark, far below the US$ 98 average of 2022. Much of that has to do with continued expectations of a global economic slowdown, which is driving investors away from oil markets.
FrontierView’s forecast is that prices are likely to pick up in H2 2023, to average US$ 84 over the year. As inflation subsides and major central banks pause their monetary tightening cycles, expectations of future demand are likely to improve. In turn, this will drive investors to oil markets, pushing prices up. Demand will also see a boost from improving growth in the eurozone and China, as well as a boom in air travel, although that is likely to be offset by some expected softness in the US economy toward the end of the year.
Meanwhile, supply tightness is unlikely to improve in 2023. The Saudi Arabian government, which is keen on capturing oil revenues to fund infrastructure projects, has been keen to keep oil prices high; its latest cut of 1 million bpd will come into effect in July. Other OPEC members, such as Nigeria and Angola, are falling far below their quotas due to deteriorating infrastructure, while in Iraq, a dispute between the central government and the Kurdish regional authorities is keeping around 700,000 barrels off the market. Finally, Russia has implemented its own production cuts of 500,000–700,000 bpd, but the extent to which they are voluntary remains unclear.
In 2024, prices for Brent crude will likely average around US$ 81. Toward the start of the year, persistent supply tightness, paired with a pickup in economic activity, rate cuts, and expectations of a recovery will push up prices. In the second half of the year however, weakness in fundamental drivers of oil demand will pull prices down. Europe’s industrial sector will continue to face difficulties, while China’s economy will still be driven by in-person service spending rather than the traditional drivers of oil demand, such as goods consumption and construction activity. Further downward pressure will come from investor behavior, which is likely to shift from commodity markets toward more risk-on assets, such as stocks and emerging market bonds, as the global economy recovers. Still, these downward pressures will be partially offset by continued supply tightness, stemming from infrastructure decay in Russia and several OPEC countries, as well as the refilling of the US’s Strategic Petroleum Reserves, which will take further oil supply off the market.
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