After a sharp drop in the first trading days of the new year, oil prices are climbing back up but the upside potential remains limited in light of the latest economic news updates and a warmer-than-usual winter in the northern hemisphere.
After crashing from over $82 per barrel to some $78, Brent crude is today on the mend, inching closer to $79 and West Texas Intermediate is moving to $74. However, the economic outlook is quite bearish.
First, earlier this week, the head of the International Monetary Fund said she expected a third of the world’s economies to slip into recession this year. This immediately weighed on prices and will continue to depress them in the absence of any evidence that counters this outlook.
Then, the December reading of the U.S. purchasing managers index turned out to be lower than expected, at 48.4 versus an expected 48.5. Despite the minor difference, it was enough to deepen the economic gloom that features expectations of weaker oil demand, not least because it was the second consecutive month of declines.
Meanwhile, covid infections are on the rise in China and worry abounds that this will delay the recovery of the global economic powerhouse despite the government’s U-turn on its zero-Covid policy.
"While reliable data is seemingly hard to come by, the view appears to be that there'll be significant disruption in the coming months and then a recovery from around the middle of the year which should then boost demand,” Oanda senior analyst Craig Erlam told AFP.
A weaker dollar also helped push oil prices higher earlier today, as did traders buying the dip of the last two trading sessions, Reuters noted in a report earlier in the day.
Brent and WTI shed a combined 9 percent in the first two trading days of 2023, the report also noted, which was the biggest two-day trading loss at the start of a new year since 1991.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- The 10 Most Influential Figures In The History Of Oil
- The Oil Market Crisis Sparked By Russia’s Invasion Is Nearing Its End
- Investors Are Increasingly Bullish On Oil Despite Demand Woes
The bullish factors of robust global oil demand, a tight oil market, a shrinking global spare production capacity and China’s returning to the market will overwhelm the bearish factor of recession.
Moreover, only one third of the global economy could be harshly affected by recession. The remaining two thirds including China, India and countries of the Asia-Pacific region are far less affected by recession because they have been buying Russian oil and gas supplies at preferential prices.
Based on the above, I will project that oil prices have no choice but to trend upwards this year with Brent crude rising to 100 US dollars in the first quarter of this year and even touching 105-110 during the year.
Dr Mamdouh G Salameh
International oil economist
Global energy expert