HFM’s Outlook 2023: US Oil

Outlook for USOIL– 2023 Outlook

The price of crude oil usually fluctuates based on seasonal demand and supply as well as world events. From the global pandemic that has been going on for more than two years to the war that started in early 2022, two events that were never thought of, fluctuations have caused  oil prices to fall from the oversold point to the overbought point. 

The extreme low was recorded at $6.64/barrel in April 2020, and the highest price was recorded at around $125/barrel in Q1 2022. And since then, the USOIL price has fallen back to its early January 2022 point. Despite attempts to bounce back in the months of April–May, since July, the bears have ruled the market until the end of 2022.

A number of effects from the 2 major events have resulted in various actions and policies from advanced economic countries that have influenced the world oil market to date and created both negative sentiment and hope for 2023. Supply disruptions caused by war, Russian economic and oil sanctions, and high inflation, which caused the central bank to act aggressively to raise interest rates, raised fears of recession. Oil prices tend to fall during a recession with less money circulating in the economy. China’s sluggish growth, social restrictions, and OPEC+’s decision are all things that have contributed to the recent fluctuation in oil prices.

On the negative side, crude oil prices in 2023 are likely to remain under pressure from global central banks’ actions to raise interest rates, causing a slowdown in economic growth and energy demand. Even though it is predicted that the increase in interest rates in 2023 will be smaller, because the results of monetary policy have shown good results with a decrease in the inflation rate, still, current inflation is still twice the bank’s target. China’s economic slowdown is clearly seen in Q4 2022, which is most likely a result of the zero-Covid 19 policy. Although a number of openings have been implemented, fears of slower openings persist into 2023, thereby threatening energy demand, especially petroleum. In the meantime, OPEC+ is still maintaining its oil production target until January, and this decision will be subject to change as demand develops in 2023. Sanctions on Russian oil are also still a catalyst that will continue to affect oil prices in 2023, and it is not known with certainty when sanctions will end; as long as the tension of the conflict is still ongoing, it is likely that these sanctions will still apply. However, Russia is unlikely to be swayed, as its Indian and Chinese counterparts will remain willing to buy its oil.

On the positive side, the market expects a change in China’s policy to ease its zero-covid policy after a number of demonstrations at the end of 2022. As the world’s largest energy consumer, this could push mobility back into place. Other factors that could play a role in the price of crude oil are inventories and market sentiment, which we will have to wait to see because we have yet to see what will happen with the continuation of interest rate hikes in 2023. Periodic reductions in rate hikes as inflation rates decline could also prop up future oil prices, if recession fears turn out to be unfounded.

Closing 2022, Russia decided not to continue supplying oil to countries that support oil price restrictions imposed by the West. Russia considers its oil price limits to be inconsistent with international law. The ban will be enforced for five months, from February 1 to July 1, 2023. For the record, Putin has the authority to extend or cancel the ban in special cases.

Observing the policies of the 2 major countries, Russia and China, with different problems, will still be a catalyst for changes in oil prices in 2023. Meanwhile, OPEC+ will continue to monitor geopolitical and macroeconomic developments to close or open their oil faucets.

USOIL Review

China’s Covid-19 policy will still affect oil demand, because it concerns global growth.
Concerns of a recession due to interest rate hikes to suppress inflation are sentiments that need attention.
Development of Ukrainian-Russian political tension, OPEC+ policy, inventories and supplies can trigger changes in oil prices.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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