Oil Outlook 2023: What's Next for Oil Prices?

2022 Oil Prices Overview – A Bumpy Ride

Following the invasion of Ukraine by Russia in February 2022, market uncertainty rose sharply, causing brent crude, the worlds oil benchmark, to jump by $50. By March, Brent had spiked to $134 per barrel, for the first time since 2008, just prior to the global financial crisis.

In the wake of the Russian-Ukraine war, market was concerned about substantial decline in Russian oil supplies to an extent that the International Energy Agency warned about the biggest supply crisis in decades. Nonetheless, the oil exports remained resilient in spite of international sanctions and the efforts to phase out Russian oil, adding to the redirection to non-Russian oil supplies, helped dissipating fears on global supplies.

Prices were again back to breakeven levels by the end of the year and almost 43% higher than 2021. 

Oil Outlook 2023: What to Watch This Year

With the threats of recession looming in the horizon and risks surrounding the world economy, oil outlook is controversial. Moreover, the energy market can be unpredictable with the interconnected factors and ever-changing landscape.

The IMF forecasts that the third of global economies will fall into the trap of recession this year. This includes the worlds top economies like the U.S, the EU, and China, combined they account for almost 50% of global oil consumption.

Similarly, The World Bank warned that “Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russias invasion of Ukraine.”

Slowing economic growth has its implications on oil outlook, as it dampens oil demand. If this scenario were to happen, downward pressures can be expected for oil prices. However, in such case OPEC+ will interfere by cutting supplies and rebalances the supply in line with demand to maintain price stability. In October 2022, the cartel announced a 2 million barrels per day production cut to in response with weaking global demand. 

It is too early to make any firm assumptions about the oil outlook this year due to the dynamic nature of geopolitics and economics. But heres what you should keep your eyes on:

Squeezed Russia

Russia is a major player in the global oil market as the worlds third-largest oil producer following the US and Saudi Arabia, and the second-largest oil exporter after Saudi Arabia. On top of that, Russia plays a vital role in OPEC+, where its production is more than twice as much as Iraq, the second-largest producer of OPEC.

In the span of last year, Russia was exposed to 9 sanctions from the EU alone becoming the most sanctioned country in the world. Sanctions were targeted to multiple sectors and specifically the oil sector. And a price cap was announced on Russian oil.

But did any affect Russia‘s production？ So far, the country’s oil production is barely unchanged. Estimates show that oil output is only 200 thousand barrels a day lower than pre-sanctions levels.

Looking ahead, experts predict further declines in Russia‘s oil output in 2023 as sanctions continue. With an estimated loss in OPEC’s production as well, oil prices can spike to new highs.

Chinas Recovery

Following its recent abandonment of the zero-Covid-19 policy in early December 2022, global markets are watching closely how the reopening of the Chinese economy will affect the global economy and specifically the oil market. China is a key driver of global oil demand as the largest oil importer and the second-largest oil consumer, after the US.

Nearly 50% of the anticipated growth in global oil demand is expected from China as the economy reopens. Goldman Sachs sees a potential increase in global demand by one million barrel per day due to the reopening of the Chinese economy this year. This could add $5 boost per barrel.

However, some analysts disagree on how fast the Chinese economy will be able to recover and bolster oil demand. Setbacks are expected during the recovery, with IMF Director stating that annual growth will likely be lower, dragging down the global economy rather than boosting it. Chinas economy grew by 3% in 2022, significantly lower than the targeted growth rate at 5.5%, marking the weakest annual growth in decades.

Supply and Demand

The International Energy Agency (IEA) is forecasting a two million barrel per day increase in global oil demand to 101.9 million barrels a day in 2023. Backed by Chinas demand, the Asia-Pacific region will be a key booster to global demand.

“World oil demand growth is picking up after a marked slowdown in the second half of 2022 and a year-on-year contraction in the fourth quarter. China accounts for nearly half the 2 mb/d projected increase this year” IEA Oil Market Report – February 2023

The agency sees the world oil supply outpacing demand in the first half of 2023; however, this could quickly reverse if there is an uptick in demand and some Russian production is halted.

Despite the sanctions, Russias oil production and exports remained relatively solid. However, the country might face a supply glut with lower demand. Deputy Prime Minister Alexander Novak recently announced that output could be cut down by 500 thousand barrels per day in March rather than sold to countries abide by the G7 oil price cap.

OPEC has also raised its forecasts for global oil demand in 2023 by 100,000 bpd, to 2.3 million bpd in its latest Monthly Oil Market Report. Economic Cooperation and Development (OECD) countries are expected to see a rise in demand of 400,000 bpd, while 2 million bpd increase is expected from non-OECD countries.

The organization stated that improving economic activity in some countries and a recovery in oil demand in China after the lifting of its zero-Covid-19 policy could uplift demand for oil.

Demand for OPEC crude oil was revised up by 200,000 barrels per day, to 29.4 million bpd, an increase of 800,000 bpd compared to 2022.

On the supply side, the IEA expects global output to grow by 1.2 mb per day in 2023, mainly driven by non-OPEC+ production, while OPEC+ production is set to decline as Russia is weighted by sanctions. With potential decline in Russian oil production and capped production by the OPEC+ cartel, non-OPEC+ producers will lead world supply growth in 2023.

2023 Oil Prices Forecast

The Brent crude oil price is seen averaging $83/b in the first quarter of 2023, slightly higher from an average $81 per barrel in December 2022, the U.S. Energy Information Administration (EIA) forecasts. Prices are seen averaging $85 per barrel in Q22023, before starting to decline in the second half of 2023 and through the end of 2024. 

A similar path is expected to the West Texas Intermediate (WTI) prices, the U.S. benchmark price, which is expected to average $77 per barrel in 2023 and $72 per barrel in 2024.

Read Top Crude Oil Trading Tips and Strategies

Goldman Sachs shared it oil outlook for 2023 expecting brent crude at $100 a barrel by December, averaging $92 per barrels for the year, compared to previously anticipated average of $98.

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