Analysts Remain Bullish On Oil Prices Despite Looming Headwinds

The past week was the weakest year-opening week for oil prices in decades, yet many analysts remain bullish on where prices will be headed in 2023. After dropping to just over $71 per barrel in early December, the price for a barrel of West Texas Intermediate (WTI) rebounded to close out the year back over $80.

But across the first week in January, both WTI and the international Brent crude price shed 9% of their value, with WTI closing the week’s trading on Friday at $73.77. Most attributed the fall to weak demand driven by sluggish economic performance across Europe, Asia and the U.S., along with increasing numbers of reported cases of COVID-19 coming out of China.

Yet many traders and analysts continue to predict crude prices will rebound strongly as the year progresses. Hedge fund manager Pierre Andurand was quoted by Bloomberg as saying that he believes the Brent price could spike dramatically once China fully reopens. Andurand said oil prices could “go upwards of $140 a barrel once Asia fully reopens,” but added that his projection assumes “there will be no more lockdowns.” No one really knows whether that assumption is a safe one.

In a pair of tweets on January 6, Andurand projected global crude demand could rise by as much as 4%, or 4 million barrels of oil per day (bopd) during 2023:

Andurand admits that this hypothetical demand spike is “about 3 times more demand growth than expected in the market,” but adds his belief that the markets are “overly focused on this big upcoming recession.” Like any other projection about future oil demand/supply and prices, Durand’s projections are opinions based on an analysis of the imperfect data and other information at hand.

In my own 2023 predictions piece last week, I quoted S&P Global Vice Chairman Dan Yergin’s statement just before Christmas that the Brent price could exceed $120 per barrel at some point during 2023. Yergin’s projection was based on one of several cases run during a recent S&P Global study. Yergin added that particular case projects Brent to average a more moderate $90 per barrel across the year, which is in line with projections from other analyst firms and banks like J.P. Morgan and Goldman Sachs.

Reuters published the results of its own survey of 30 economists and analysts at the end of the year, and the consensus result was a projected average 2023 Brent price of $89.37. Reuters notes that Brent averaged about $99 per barrel during 2022, but the price has not attained that level since August and hasn’t hit $89.37 since November 17.

In its 2023 Market Outlook, J.P. Morgan is more sanguine about the potential for recession, saying up front that “[t]he global economy is not at imminent risk of sliding into recession, as the sharp decline in inflation helps promote growth” before noting that its baseline case does assume a U.S. recession likely to begin late in the year. As part of its Outlook, JPM projects the Brent price to average $90 per barrel across the next 12 months.

Natasha Kaneva, JPM’s Head of Global Commodities Strategy, adds that the $90 projection represents a significant drop in the firm’s previous oil price number. “After maintaining our price view for eight months, we now opt to shave $8 off our 2023 price projections, on our expectations that Russian production will fully normalize to pre-war levels by mid-2023,” Kaneva says. “Despite more pessimistic expectations for balances over the next few months, we find the underlying trends in the oil market supportive and expect global Brent benchmark price to average $90/bbl in 2023 and $98/bbl in 2024.”

While what happens in China related to COVID policy and a potential recession are two big factors to watch during 2023, OPEC+ is another. With many of its member countries already producing crude at their total capacity, the chances of the cartel intervening in the market in a bearish way are minimal. But the group has demonstrated several times since 2020 that the chances of its ministers agreeing to intervene aggressively in a bullish way are relatively high under certain circumstances.

Absent from all of the various projections for the year is any talk around a big rise in U.S. domestic production driven by the shale industry. While that part of the global supply picture is expected to remain stable and healthy this year, no one expects a major uptick in overall supply from the world’s biggest producer of crude comparable to the 2 million barrels per day the industry added in 2018. Most anticipate an increase in the 500-600 thousand bopd range, a modest rise that will add to global crude supplies but not become any sort of bearish factor on prices.

Taken altogether, what we have at the moment is a fairly strong consensus view that the Brent price will average roughly $90 per barrel across the 12 months of 2023. That seems a bullish consensus given last week’s precipitous price drop and the headwinds prices will face in the coming year absent major developments in China and with Russia’s war on Ukraine.