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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Where Are Oil Prices Heading In 2023?

  • Recession is the keyword for oil prices at the beginning of 2023.
  • The Fed isn’t abandoning its hawkish stance at the start of the year, and could possibly inflict more damage on oil markets.
  • Oil bulls see the reopening of the Chinese economy as one of the most bullish factors this year.

At the beginning of 2023, several factors are at play in determining the short and medium-term trend in oil prices this year. Supply and demand concerns, tightening monetary policy globally, expectations of a material slowdown in economic growth and possible recessions, and China’s reopening with a Covid exit wave are all impacting crude oil prices.   

During the first week of the year, oil prices tumbled by 9% in the first two trading days for the worst start to a year since 1991. The price of Brent Crude dipped to below year-ago levels for the first time in two years, possibly suggesting that “broader inflation has peaked and could fall rapidly in the coming months,” Reuters columnist Jamie McGeever notes.

The annual change in the U.S. benchmark, WTI Crude, has also turned negative several times over the past two months.   The base effects, that is, prices and the inflation rate compared to the same time last year, are falling and could signal deflation in energy commodities, which could intensify the drop in broader inflation to closer to the Fed’s 2% target, according to McGeever. 

Still, the Fed isn’t abandoning its hawkish stance and determination to fight inflation which is “persistent” and at an “unacceptably high level,” according to the minutes of the Federal Open Market Committee (FOMC) from the December meeting released this week. 

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time,” the Fed said. 

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“Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path,” according to the FOMC minutes.  Related: The Upside For Oil Prices Is Limited

This week, Federal Reserve Bank of St. Louis President James Bullard said that the prospects of a soft landing for the U.S. economy have increased compared to the autumn of 2022, thanks to a strong and resilient labor market. 

“The policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer,” Bullard said in a presentation on Thursday. 

Nevertheless, concerns about a recession persist. The current weak oil demand in both the U.S. and China adds to the immediate-term bearish outlook on oil prices.  

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“Oil is trying to rally but demand concerns are keeping the gains small.? The Saudis are slashing prices as the short-term crude demand outlook seems like it won’t quite get a major boost from a robust China reopening,” Ed Moya, Senior Market Analyst, The Americas, at OANDA, said on Thursday when oil prices inched higher after the massive selloff on Tuesday and Wednesday. 

However, the weekly EIA report indicated that implied gasoline demand fell last week by the most since March 2020, and crude oil and distillate demand posted significant declines from a week ago, Moya noted. 

ING strategists said on Thursday, “The oil market is looking better supplied in the near term and risks are likely skewed to the downside. However, our oil balance starts to show a tightening in the market from the second quarter through to the end of the year, which suggests that we should see stronger prices from 2Q23 onwards.”  

According to broker PVM Oil, “There is no doubt that the prevailing trend is down, it is a bear market.” 

“Readily available Russian crude also played its part in the continuous move lower and so did the co-ordinated SPR release. The question now is whether these forces will be at play throughout 2023 and whether the cheapening of oil prices will be the main theme this year.”  

By Tsvetana Paraskova for Oilprcie.com

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Leave a comment
  • Mamdouh Salameh on January 08 2023 said:
    Despite of what seems to be a bit of hesitation on the part of oil prices, their trajectory, in my opinion, points upwards in 2023.

    Prices will continue to be underpinned by many bullish factors including China’s easing of its lockdown, robust global oil demand, a shrinking global spare production including OPEC’s and a huge underinvestment in oil and gas. Against these bullish factors the global oil market faces the bearish factor of recession in one third of the global economy particularly the United States and the EU.

    It boils down to whether China’s re-joining the global market could prevail over concerns about recession. One supporting evidence for the China factor is the way its emergence from the COVID at the height of the pandemic in 2020 pulled the global economy from virtual collapse to the road of recovery.

    According to Professor James D. Hamilton, professor of Economic at the University of California, San Diego, the reason oil prices were going up in 2021 was because demand recovered from COVID faster than production. That created some supply pressure, shortages, and increase of prices thus giving rise to inflationary pressures.

    Still, the US Federal Reserve seems committed to trying to bring inflation down by raising interest rates. That leads to an appreciation of the dollar and lowers U.S. demand for goods and this according to Professor Hamilton has contributed to the recent declines in commodity prices. If the Fed continues to raise interest rates until inflation returns to normal levels, it could well result in a recession. As long as the Fed remains focused on higher interest rates, it will be a factor in holding the price of oil down.

    Still, crude prices have, in my opinion, no alternative but to resume surging with Brent crude headed towards $100 a barrel or even higher in the first quarter of 2023.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • Jeremy Breittling on January 08 2023 said:
    Oil prices are going over 100/b.

Leave a comment




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