Analysis | Where will the oil price go in 2023, what are the predictions?
The past year 2022 was dynamic for the financial markets. All asset classes were under severe stress, with two leading causes - central banks' battle with inflation and the war in Ukraine.
It was the Ukrainian crisis that was at the root of the instability of the oil markets in the previous months. Shortly after Russian troops invaded Ukraine at the end of March, black gold jumped to $130 a barrel, the highest level since 2008.
At the end of the year, prices managed to stabilize, moving in the range of 70-80 dollars. The big question that market participants are asking themselves is where will oil go this year.
What are the predictions?
In November, the investment bank Goldman Sachs said that in 2023 the average price of Brent oil would be $110 per barrel, but now the bank's analysts have revised their forecast to $98 per barrel.
Goldman Sachs is among the most bullish on average oil price forecasts. According to the EIA (Energy Information Administration), the realistic price for oil this year is $92 per barrel. Another leading investment bank - JP Morgan is even more pessimistic, giving a forecast of $90 per barrel (down from the previous expectation of $98).
Traders should note that all price forecasts from both banks and international organizations will be subject to change throughout the year. With that in mind, here's a look at the most important factors that will determine black gold prices in 2023.
Factors that may increase the price of oil:
End of China's zero covid policy
China has already started to loosen its restrictive policies regarding the fight against COVID19, but it seems that there is still hesitation among the Chinese authorities whether restrictions should be lifted completely and economic life should be normalized. China is the second largest economy in the world. Oil demand is likely to pick up in the second half of the year as the country eases restrictions. And this is a factor that can lead to an increase in oil market prices.
The US is filling its oil reserves
After selling record amounts of oil from its Strategic Petroleum Reserve, the White House faces the task of filling it. However, for this purpose, the government wants a profitable deal that happens at better prices. At $65-70 a barrel, this could be a good deal for many oil companies wary of lower prices. Given the amount of oil the government wants to buy, it's entirely possible that the additional source of demand could help push prices up.
Sanctions on Russian oil products
These sanctions will come into effect in February and are likely to cause a short-term increase in the prices of petroleum products in Europe. However, more and more Russian crude is being shipped to China, Turkey and Indonesia for refining. Against this background, in the long term prices of gasoline and diesel should decrease, as the US and Europe currently have no sanctions imposed on petroleum products produced with Russian crude oil outside of Russia.
OPEC+ cuts or maintains production quotas
OPEC+ countries may try to boost oil prices by cutting production quotas later in the year. Maintaining current yields in the face of rising oil demand is also an option that investors should not overlook.
Depreciation of the dollar
The price of oil is quoted in dollars, and if the US dollar continues to depreciate against foreign currencies, oil producers will have to sell their output at higher prices to get the same revenue in their currencies.
Factors that may lower the price of oil:
Global Recession
Many economists believe we are on the brink of a global recession, with indications that Europe and the US will enter recession this year. During a recession, the demand for oil decreases, and hence its price decreases.
OPEC+ increases production
In the event of a recession, it is possible that OPEC+ will increase production to reduce the economic burden on struggling economies. At this stage, however, only Saudi Arabia, Iraq and the UAE have the capacity to increase production, so any increase in output will be relatively small and unlikely at this time.
Russia and the EU iron out their differences and resume trade in energy resources
Western sanctions against Russian oil and gas may prove too difficult for EU politicians. Expensive energy would make production more expensive for European companies. They may therefore be forced to settle their differences with Russia and resume buying cheap Russian gas and oil. This would lead to lower oil prices in 2023.
US-Iran nuclear deal ends oil sanctions
Until now, negotiations on a nuclear agreement with Iran have not been a top priority for the White House, but this year they could become an important foreign policy issue. Under pressure, President Biden's administration may try to reach a new nuclear deal with Iran and end sanctions on the Islamic Republic's oil industry. If it does, the resumption of trade in Iranian oil on world markets will lead to lower prices.
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