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Will Oil Continue To See Extreme Volatility?

Last year saw some quite significant swings in oil prices, mostly driven by geopolitical events but also by China's zero-Covid policy. This year appears to signal calmer waters for the world's most traded commodities. On the surface.

In a recent poll across industries, Reuters' market columnist John Kemp found that the majority of respondents expected oil prices to average $90 per barrel in the period 2023 to 2027. He also said this year's forecast average for Brent was $87 per barrel.

Right now, Brent crude is trading at around $84 per barrel, with West Texas Intermediate at close to $80 per barrel. And while some banks expect much higher prices, others expect a stable year for oil.

According to the Wall Street Journal, there are two factors that will determine the level of volatility for oil prices this year. The first one is China. The other is the U.S. shale industry.

Last week, Bloomberg polled 11 China-focused consultants who reported that they expect oil demand in the world's largest importer to soar by 800,000 bpd this year. This means it would reach 16 million barrels daily and account for 50 percent of the world's total oil demand growth this year.

The increase in demand forecast by the analysts polled by Bloomberg as well as others who expect higher oil prices, will be driven by Beijing's end of the zero-Covid policy that stifled oil demand growth last year and the year before that. As China reopens, almost everyone expects a surge in its oil demand.

Yet some have taken a more cautious stance because the fact that Beijing abandoned its zero-Covid policy does not mean that Covid abandoned China. There have been reports of surging infection rates, higher mortality rates, and closer attention to Chinese Covid data from the World Health Organization.

The Chinese economy cannot restart if there are not enough people to restart it, Mizuho Securities energy futures executive Robert Yawger told the Wall Street Journal. This means that the country's oil demand might not grow as much as expected if the surge in infections continues. And if that turns out to be the case, then oil prices won't have much higher to go.

Yet if oil import quotas are any indication, China's demand will grow this year. Earlier in January, Beijing issued the second crude oil import quota batch for this year, bringing the total so far to 132 million tons of crude, up from 109 million tons this time last year. That's an increase of 23 million tons or 168 million barrels, and it could-and already did-certainly make a difference in oil prices.

Then there's U.S. shale. The Wall Street Journal article suggests shale drillers are unlikely to reconsider their guarded approach to production growth this year, which means upside potential for oil prices as supply growth remains limited.

The shale industry itself has signaled repeatedly it has no intention of returning to growth-at-all-costs mode. Even the EIA has revised down its forecast for U.S. oil production growth, expecting an increase of some 600,000 bpd for this year in its latest Short-Term Energy Outlook, down from about 1 million bpd forecast in early 2022.

Meanwhile, some analysts expect the oil market to swing into a deficit yet again, adding more upside risk for prices. Goldman Sachs, for instance, sees oil demand growth at 2.7 million barrels daily this year, pushing Brent crude to $105 per barrel in the second half of the year. 

Morgan Stanley also expects higher oil prices in the year's second half, largely on the back of demand rebound from China. The investment bank also noted the slowdown in U.S. shale output growth, uncertainty about the availability of Russian oil, and the end of oil releases from the U.S. strategic petroleum reserve among the bullish factors for oil.

It's worth noting that a Biden advisor last week suggested the administration could continue releasing oil from the SPR this year, which, if it happens, might have a positive effect on prices: the SPR has gone down from 564 million barrels to 371 million barrels, which is the lowest since 1983.

Yet one strong, bearish factor will counter all the bullish ones this year, and that's the general market sentiment about the global economy. With warnings about a recession popping up in news feeds on a daily basis, the bright outlook for oil stops looking that bright.

At the same time, some analysts have softened these warnings by arguing that recession won't be that bad, at least not for the U.S. and Europe, which would, in turn, reduce the downside risk for oil prices.

Inflation in the U.S., for instance, has been declining for six consecutive months, rekindling optimism about the immediate future of the economy. And Germany surprisingly posted actual GDP growth for last year. This suggests a stronger global economy, which would, in turn, suggest higher-but moderately higher-oil prices for the year.

By Irina Slav for

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Irina Slav

Irina is a writer for with over a decade of experience writing on the oil and gas industry. More