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Oil prices forecast: Will the prices rally to cool?


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Oil prices forecast: Will the prices rally to cool? Oil pump, industrial equipment
Oil prices forecast: Will the prices rally to cool? Photo: pan demin / Shutterstock.com

After rebounding to above $120 per barrel (bbl) in mid-June, oil prices have retreated to $110/bbl in the past two weeks.

Conflicting supply and demand factors have increased uncertainty on the oil price forecast. Fears of recession have intensified, which could hurt oil demand. In addition, extended sanctions against Russian oil exports have increased uncertainty about supply from the world’s second largest oil producer behind Saudi Arabia. 

The US, which is struggling to lower high domestic fuel prices, may take steps that could affect the global oil market, such as a proposed curb on US oil exports. 

With so many factors pulling oil prices in different directions, will oil prices pause or resume their rally in the second half of 2022? Read on for an examination of all the factors affecting oil prices movement and the latest oil price forecast from analysts.

Brent price performance and major drivers

Brent crude oil price chart

In the first six months of 2022, the price of international benchmark Brent crude oil was hit by the Russia-Ukraine conflict and fears that a possible global recession would dent demand.

After trading at $77/bbl to $79/bbl in the last weeks of December 2021 and early 2022, Brent spiked to $100 in mid-February following Russia’s invasion of Ukraine. On 7 March, it rose to $139.13 in response to US President Joe Biden’s ban on Russian fossil fuel exports. 

The gain did not last long. Brent dropped below $100 by mid-March amid worries over demand after China, the world’s largest oil importer, imposed new Covid-19 lockdowns. 

The price gradually rebounded above $100 on supply concerns after more countries joined the US to ban Russian oil imports and the anticipated rebound of demand from China when the country eased its Covid-19 restrictions. 

Brent reached $125 a barrel on 14 June for the first time since 9 March, tight supply trumping worries about sluggish global economic growth.

The EU has banned imports on all seaborne Russian crude oil and petroleum products, which cover 90% of the block’s current oil imports from Russia. The ban is part of wider international sanctions on Russia over its invasion of Ukraine. 

Additionally, a worsening political impasse in Libya has halted production from the Organization of Petroleum Exporting Countries (OPEC)’s members, squeezing an already constrained oil market. ANZ Research, in its note on 4 July, estimated that due to political unrest Libya’s oil production could fall to 500 to 600 thousand barrels per day (kb/d) from 1.1 million barrels per day (mb/d) in April.

In its monthly oil market report for June, OPEC revealed 13 of its members pumped a total of 28.51 mb/d in May, a decline from the previous month’s 28.68 mb/d. Global liquids production in May decreased by 0.15 mb/d to average 98.75 mb/d. 

However, the Brent price has retreated in the past two weeks as recession fears returned despite supply remaining tight. 

At the time of writing on 5 July, Brent was traded at $111.02/bbl, having fallen 11.02% from 14 June, but risen 41.89% from its opening price of $78.24 on 3 January 2022.

WTI price performance and major drivers

West Texas Intermediate (WTI) crude oil price chart

Despite having a lower sulphur content than Brent crude, West Texas Intermediate (WTI) crude oil is typically less expensive. This is because Brent, which is produced from the North Sea oil fields, will be limited in the long run due to natural decline. North America, on the other hand, has increased output from shale and oil sands, catapulting the US to the status of a major exporter. 

However, the price of US-produced WTI has been catching up with Brent this year on the prospect of rising demand for US crude as buyers were looking for alternatives to Russian oil. WTI and Brent are both high-quality, light, sweet crude oils with low density and sulphur content. Refiners prefer light oil because it is easier to distil, refine and transport.

On June 27, Rystad Energy predicted oil shipments from the US Gulf Coast could surpass pre-Covid-19 level of 3.2 mb/d in the first quarter of 2020 to reach an all-time high of 3.3 mb/d in the second quarter of 2022, as refining capacity outages limit operators’ ability to meet demand and the US government’s Strategic Petroleum Reserve (SPR) increases supply, 

The US Gulf Coast’s oil exports are expected to cross 4 mb/d in the second quarter of 2023, according to Rystad Energy.

In early January 2022, WTI was trading at $76/bbl compared to $79/bbl for Brent. On 7 March, WTI crossed above $130/bbl, trailing Brent after the US announced a ban on Russian energy imports, including oil and petroleum. 

Similar to Brent, WTI oil price gradually retreated to below $100 in mid-March on concerns that fresh Covid-19 lockdowns would dent demand from China. The downtrend was short-lived as tight global supply still hit the oil market. WTI rebounded to above $100 and advanced to $123.68 on 14 June before giving up gains. 

Apart from international factors, WTI crude oil price has been affected by the Biden administration’s proposal to curb US crude oil and product exports to tame soaring domestic fuel prices. 

Rystad Energy forecast US production to reach 13 mb/d this summer, boosted by the government’s support to increase US supply. Artem Abramov, head of shale research at Rystad Energy, noted:

“Domestic refining capacity in the US remains depressed compared to pre-Covid levels, so it’s no surprise that government intervention to support crude supplies has resulted in an increase in exports of domestically produced light barrels. It means the US is able to support global markets amid the most challenging energy crisis in at least 30 years.”

As of 5 July, WTI was trading at $102.48/bbl, losing about 17% from 14 June. However, it gained 35.8% year to date (YTD) from $75.43. 

Oil price forecasts: Analysts’ view

With new developments in the past two weeks, what are analysts' views on the crude oil price forecast?

While the oil market has been hit hard by fears of slowing economic growth as central banks tighten monetary policies to fight rising inflation, it would need a very significant fall in demand for oil to offset disruptions on the supply side, wrote ANZ Research’s senior commodity strategist Daniel Hynes and commodity strategist Soni Kumari on 30 June.

According to the World Bank’s study, there have been four global recessions over the past seven decades: in 1975, 1982, 1991 and 2009. Based on ANZ Research data, oil demand fell between 0% to 3% in three of those four recessions, except in 1982 when demand dropped nearly 8%. 

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Change in oil demand during global recessions

“Current events present a new challenge to the oil market. The supply shock is significantly higher than it experienced before. The Gulf and Iran-Iraq wars impacted only 5% and 2% of global supply respectively. Russia produced around 10% of world supply in 2021 and has been part of the OPEC+ alliance that has helped stabilise the market over the past two years,”  wrote Hynes and Kumari.

Combined with strong demand, the analysts estimated there could be a deficit of around 2 mb/d in the second half of 2022.

“If we assume a global recession pushes global oil demand lower by 3%, the market would still not be oversupplied,” they added.

Bank of America (BofA) Global Research said in its note on 17 June that supply challenges could worsen over the coming months if the EU fully implements its plan to curb Russian crude oil and petroleum product imports to a trickle. 

In its oil price forecast for 2022, BofA estimated prices could spike to $150/bbl if EU sanctions reduce Russian oil production by 1 mb/d to below 9 mb/d. However, it projected the tight global oil market could balance out heading into the second half of this year and 2023.

On the contrary, on the demand side, BofA warned high oil prices and stronger US dollar, partly due to the Fed’s aggressive move to hike rates, could risk demand contraction in large oil-importing countries such as India, Japan, Turkey, South Africa and Germany.

“While sanctions on Russian energy could set a floor on oil and other energy prices in the months ahead, we note that energy affordability is quickly becoming an issue around the world too,” BofA said.

BofA forecast global oil demand to rise 0.9 mb/d to 99.6 mb/d in 2022 – below the 2019 average of 100.5 mb/d.

“One of the main consequences of supply scarcity is that we no longer expect global oil demand to surpass pre-Covid levels, on average, this year. A number of petroleum products continue to lag the ongoing post-Covid consumption recovery, but given the bottlenecks on the refining front and the low inventory position, we now believe a full recovery will have to wait until 2023,” it added. 

BofA and ANZ Research did not provide oil price forecasts for 2025 or oil price forecasts for 2030.

Brent crude oil price forecast: 2022 to 2023

Brent crude oil 5-year price chart

In its Brent crude oil price forecast for 2022, BofA expected the price to average $104.48/bbl this year and $100/bbl in 2023. 

“With oil supply being a key constraining factor and demand still sitting below pre-Covid levels, we believe that prices will have to keep a lid on the desired level of global fuel consumption,” BofA wrote in the note. It expected global oil consumption growth to continue to decline over the next two years. 

ANZ Research projected the Brent crude oil price to average $113.8 in 2022 and $104.5 in 2023:

“If we assume that global oil demand falls by 2.5% as economic activity slows, oil markets will rebalance. This would see inventories stabilise, supporting oil prices at $100/bbl.”

Fitch Solutions has maintained its forecast for Brent crude oil price at $100 in 2022 and $90 in 2023. 

Meanwhile, economic data provider Trading Economics was bullish on its Brent crude oil price forecast. It forecast Brent  to average $115.50/bbl by the end of Q2 2022 and $$127.95/bbl in 12 months time.

WTI oil price forecast: 2022 to 2023

 West Texas Intermediate (WTI) 5-year price chart

In its WTI crude oil price forecast, BofA projected the US oil to average $100/bbl 2022, before falling to $95/bbl in 2023. 

ANZ Research expected the US oil to trade at an average of $110.8 this year. ANZ’s WTI price projection for 2023 predicted the price could ease to $103.4 in 2023. 

Fitch Solutions predicted WTI to average $97/bbl this year and $87/bbl in 2023. 

Trading Economics expected WTI to trade at $112.51/bbl by the end of this quarter, rising to $125.68 in 12 months. 

Keep in mind that analysts’ oil price forecasts may be inaccurate. Forecasts shouldn't be used in place of your own independent research. Always perform your own research before making an investment. Furthermore, never trade or invest money that you cannot afford to lose.

FAQs

Is crude oil a good investment?

At the time of writing on 5 July, Brent and WTI prices were expected to fall in 2023, according to ANZ Research, BofA and Fitch Solutions, as global oil demand growth slows. However, oil price forecasts can be influenced by unpredictable developments.

Whether crude oil is a good investment for you or not will depend on your portfolio composition, investment goals, and risk profile. Different trading strategies will suit different investment goals with short or long-term focus. You should do your own research. And never invest what you cannot afford to lose.

How high can crude oil prices go?

Trading Economics forecast that in 12 months WTI could trade at $125.68 and Brent at $127.95/bbl. 

Note that the oil price forecasts from analysts can be wrong. Forecasts shouldn't be used in place of your own independent research. Always perform your own research before making an investment. And ever trade or invest money that you cannot afford to lose.

Should I invest in crude oil?

Crude oil prices have been notoriously volatile due to its role in the global economy and myriads of factors affecting the prices, including geopolitical tensions and output disruptions. 

Whether crude oil is a good investment for you or not will depend on your portfolio composition, investment goals and risk profile. Different trading strategies will suit different investment goals with short or long-term focus. You should do your own due diligence. And never invest what you cannot afford to lose.

Further reading:

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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