Energy Markets Stabilize, OPEC Maintains Pressure

Crude oil prices declined 30% since the second half of last year as Zero Covid lockdowns in China weakened the global economic outlook and Russia exported more oil, despite crippling sanctions due to Moscow’s invasion of Ukraine.

Concerns about a global recession weighed on oil prices last year and are likely to do so into this year. NYMEX’s West Texas Intermediate (WTI Crude) fell to $80.16 a barrel on December 30 from $115.26 a barrel at the start of June, and has traded below $80 a barrel in 2023.

Although Goldman Sachs said in a report on December 13 that the oil markets’ weakness was “transient,” reflecting China’s lockdowns and “higher-than expected oil flows” from Russia, quite a few other analysts are expecting oil prices to remain bearish though the first quarter of the year, at least. A survey of 30 economists and analysts forecast Brent Crude would average $89.37 a barrel in 2023, about 4.6% lower than the $93.65 consensus in a November survey.

“The bearish factors have been piling up for a few months,” Osama Rizvi, energy analyst at Primary Vision. “A slowdown in China's economy will be the driving force in establishing a bearish outlook."

China’s economic malaise - and Russian oil exports – isn’t the only factor driving bearish oil sentiment.

Concerns about the health of the global economy, inflation embedded in the US economic system and a period of higher interest rates are also impacting oil’s outlook. Geopolitical uncertainty is playing its part, particularly the war in Ukraine and U.S. tensions with China.

With these multiple conditions taking the wind out of the sails of economic growth, Goldman Sachs CEO David Solomon said in early December that he thinks “there's a very reasonable possibility that we could have a recession of some kind." CEO of JPMorgan Chase Jamie Dimon has also warned that inflation may soon wipe out consumer wealth and send the US into a recession.

Underscoring these fears, the International Monetary Fund and World Bank expressed their concerns last month about a worsening global economic outlook. IMF’s Managing Director Kristalina Georgieva said on January 1 during an interview on the CBS Sunday morning news program "Face the Nation" that 2023 will be tougher than 2022. "Why? Because the three big economies - the U.S., EU and China - are all slowing down simultaneously," she said.

She pointed out that for “the first time in 40 years” China's growth in 2022 is likely to be at or below global growth. "For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative," she said.

The IMF currently forecasts that global growth will be 2.7% this year, slowing from 3.2% last year. But political research and consultancy firm Eurasia Group paints a more pessimistic picture, projecting global GDP growth will decline to below 2% in 2023. This follows a decline from 6% to 3% between 2021 and 2022.

These economic variables are likely to impact OPEC+ policy as the oil producing bloc looks to maintain price stability. OPEC+ decided in October to cut output by 2 million barrels per day starting in November until December 2023.

Following the decision, oil continued its decline, falling about 17% between November 1 and January 6. And in December, OPEC produced 29 million barrels a day during the month of December, the survey showed, surging 120,000 bpd from November.

If oil prices continue their slide, OPEC may make a decision to cut output before its next meeting in June.

Pioneer Natural Resources CEO Scott Sheffield said at a Goldman Sachs Conference earlier this month that Saudi Arabia was “not going to let Brent stay around $75 a barrel” and that it wouldn’t surprise him “if they had another cut.” RBC head of global commodity strategy Helima Croft told the Australian Financial Review “we see clear scope for OPEC to adjust production.”

If OPEC+ moves to establish a price floor of about $90 a barrel, tensions may rise with consumers, as they did with Washington after their October decision to further cut production. “Higher prices will prompt the US to intervene directly in markets and punish moves by oil-producing states it sees as politically motivated," Eurasia Group said.

Despite the bearish outlook, Goldman Sachs and Eurasia Group see the market recovering. “Next year will see strong sequential demand growth from China’s reopening and recovering international travel, supporting overall demand growth of 2.0 mb/d (YoY FY23),” Goldman Sachs wrote. “As such, we expect Brent prices to rise to $100/105/bbl in 3Q23/4Q23 respectively.”

Eurasia predicts that “a faster-than-expected economic recovery in China driven by the country's sudden exit from zero-Covid policies, combined with only a shallow recession in the United States that will not cause demand destruction, will increase crude-oil demand growth and expose an acute lack of new supply.”