Oil Market Outlook 2023: Fewer Predictions, More Guidance

It’s time for an oil market outlook for 2023, keeping in mind my regular rules: fewer predictions and more guidance on what to look for.

We have already seen major institutions cutting their oil price forecasts for 2023. Goldman Sachs, for example, recently changed its forecasts for the price of Brent in Q1 and Q2 of 2023 to $90 and $95 a barrel from $115 and $105 per barrel, respectively.

In November, Goldman said Brent would average $110 per barrel in 2023, but the bank now thinks it will only average $98 per barrel. Goldman is on the higher end of the forecasts for the average price of Brent—the EIA currently has $92 per barrel, and JP Morgan has $90 per barrel (down from a previous forecast of $98).

Traders should keep in mind that all price forecasts from banks and international organizations will be amended as the year progresses. With that in mind, here’s a look at some of the issues that could be the most important drivers of oil prices in 2023.

Factors That Could Push Oil Prices Higher in 2023

• The End of China’s Zero-COVID Policy

China is already ending its restrictive COVID policies, but it appears there is a great deal of hesitancy to return to normal economic life. Oil demand is likely to pick up by the second half of the year and could drive global oil prices higher then.

• The U.S. Refills its SPR

After selling record-breaking amounts of oil from the U.S. strategic petroleum reserve, the White House is now looking to replenish it. The government wants a bargain, but at $65-$70 per barrel, this could be a good deal for many oil companies fearing lower prices in 2023. Given the amount of oil that the government wants to buy, it is possible that an extra source of demand could help lift prices overall.

• Stagnant or Falling U.S. Oil Production

The EIA still forecasts that oil production will hit 12.34 million bpd in 2023, but many oil firms are indicating that they are not likely to produce more oil than they are right now.

Given supply chain constraints, regulatory uncertainty, a challenging labor market, and pressure from shareholders to return value to them as opposed to investing in new production, it is possible that we will see U.S. oil production stagnate or even dip at exactly the same time as global demand for oil is rising. This would push up oil prices.

• Sanctions on Russian Seaborne Petroleum Products

These sanctions will go into effect in February and will likely cause at least a short-term increase in gasoline prices in Europe. However, as more Russian crude is shipped to China, Turkey, and Indonesia for refining, the prices for petroleum products should come down as there are no sanctions for the U.S. or Europe on petroleum products made with Russian crude oil outside of Russia.

• OPEC+ Cuts or Maintains Production Quotas

OPEC+ may attempt to lift oil prices by cutting production quotas in 2023 or by keeping production quotas as they are in the face of rising oil demand.

• Further Inflation/Devaluation of the U.S. Dollar

Oil is priced in dollars, and if the U.S. dollar depreciates compared to foreign currencies, oil producers will need to sell their oil at higher prices in order to bring in the same revenue in their currencies.

• Unforeseen Natural Disaster or War

For example, these could include an exceptionally cold winter, a nuclear disaster, or a hurricane. Geopolitical issues might include Chinese encroachment on Taiwan or a flare-up in the Middle East.

Factors That Could Push Oil Prices Lower in 2023

• Global Recession

Many economists think that we are on the verge of a global recession, and there are indications that Europe and the U.S. will enter a recession in 2023. Generally, oil demand and, therefore, oil prices drop during a recession. However, gasoline demand and distillate demand are still strong, contradicting other signs of an impending recession.

• OPEC+ Increases Production

In the event of a recession, it is possible that OPEC+ may increase production in order to lessen the economic burden on struggling economies. However, at this point, only Saudi Arabia, Iraq, and the UAE have the capacity to raise their output, so any increase in production would be relatively muted.

• Chinese Oil Demand is Lower than Expected

China’s reopening may not go as planned, and in that case, China’s oil demand could increase more gradually than expected, putting less pressure on global oil supplies. This could push prices down or at least keep them from rising.

• Russia and the EU Settle Their Differences and Resume Energy Trade

It is possible that the challenges of living without Russian oil and gas will prove too difficult for E.U. policymakers. They may be compelled to resolve their differences with Russia in 2023 and resume buying Russia’s cheap natural gas and easily accessible oil. This would bring oil prices down in 2023.

• U.S./Iran Nuclear Deal Ending Oil Sanctions

Negotiating a nuclear agreement with Iran is not a top priority for the White House at this time, but it could become an important foreign policy point in 2023.

Under pressure, the Biden administration might try to reach a new nuclear agreement with Iran and end the sanctions against its oil industry. If so, the reintroduction of transparent Iranian oil trading on the global market would push prices down.

*Happy Holidays to all!*

Disclosure: The author does not own any of the securities mentioned in this article.