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EOA 2023 Oil Market Outlook

One of the least appreciated risks in the oil market: The increased substitution among energy sources

MAIN TAKEAWAYS

2023 is expected to be a tale of two opposite halves: bearish to neutral in the first half and bullish in the second.
Global oil demand is expected to reach a record high in 2023, defying all earlier forecasts of peak demand in 2019.
Almost all average price forecasts for 2023 are between $80/b and $100/b. Our estimate is toward the lower end of these forecasts.
Any OPEC+ production cuts will create a price floor but may not raise prices significantly.
Refilling the US SPR will have a limited impact on the oil market.
Russia’s oil exports are not expected to decline significantly in 2023, but the Russian government may be forced to reduce taxes on oil companies.
The impact of China’s reopening on energy markets will be felt in the second half of 2023. Beijing, however, will likely release oil from its SPR as oil demand and prices rise.
The return to fossil fuels in Europe and some US regions last year to address energy needs was unprecedented. A repeat in 2023 should call for a new way of thinking with a focus on relative prices of energy sources.

SUMMARY

2022 was a historic year for all energy markets. In the oil market specifically, last year saw the largest release of oil from the US Strategic Petroleum Reserve (SPR) in history, as well as unprecedented western sanctions against a top oil producer like Russia, while China, the world’s largest oil importer, experienced prolonged COVID lockdowns. In Europe, some countries which adhered over the past decades to anti-fuel subsidies policies found themselves compelled to change course amid a biting energy crisis that took a heavy toll on European consumers. The energy crisis also forced some countries in Europe and regions in the US to return to oil-fired power generation and heating. All these momentous events changed the direction of global oil trade.

As for 2023, we don’t expect it to be as historic as last year.

Herein we share with our readers the EOA’s 2023 oil market outlook, in addition to other forecasts that have been made by different groups. Based on the data we have compiled, it is most likely that the first half of this year will be different from the second. Our initial assessments show that during the first half of 2023, the oil market will be in a bearish or neutral state, while bullish in the second half, especially in the fourth quarter. Other publications have arrived at similar assessments, but the difference between our forecasts and what’s been published is the duration of the state of bearishness or bullishness.

A BEARISH TREND

Regarding global oil demand, we expect it to grow and hit a record high in 2023, even in the event of an economic recession during the first half of the year. Our forecast differs from others in the rate of growth. Our estimated growth is more conservative than most due to the wobbly economies of China and Europe. The recent decline in crude oil prices, amid Russia’s ongoing war in Ukraine, and relatively high global inflation, will most likely prevent higher oil demand growth in oil-producing countries. Meanwhile, refining issues will lead to higher petroleum products prices relative to crude prices, especially with respect to diesel prices, which could be higher than what’s recorded in normal circumstances.

Regarding the issue of refilling the US SPR, and if it occurs in 2023, we believe that it will have a limited impact on oil demand and prices, and we will revisit this topic in detail in the next few weeks. We also believe that China’s reopening will have a limited impact on global oil demand in the first half of 2023, thus leaving the market between a bearish and neutral state. However, we believe that this state will then turn bullish in the second half.

Meanwhile, growth in global oil production in 2023 will mostly come from non-OPEC members. As for Russian crude oil production, it is expected to contract, but not at significant rates. As we noted in our previous newsletters, the impact of western sanctions and the G7-led price cap on Russian oil will be limited as Moscow will continue to divert its oil from Europe to other regions, either directly or through various shipping schemes. We also believe that Russian oil will end up in Europe despite sanctions.

While lower investments will hamper Russian production, most of this impact on Russia’s oil industry will be seen in 2024 and 2025. In the meantime, lower oil prices accompanied by large discounts on sold Russian oil will have a significant impact on Moscow’s finances. Under such circumstances, the Russian government will have to further reduce taxes to keep oil exports flowing at high rates, otherwise, companies will start shutting in oil production.

Moving to Libya and Nigeria, if the security environment continued to improve in these two OPEC members, this could increase their oil production, thus leading to a significant rise in OPEC’s oil output that could exceed the 2022 levels. As for oil output policies, we don’t expect surprising decisions from OPEC/OPEC+ in 2023.

Turning to oil production in the US, we expect growth, including in shale production. However, low natural gas prices, and sometimes negative prices, could threaten oil production in certain tight oil plays. Offshore activities, meanwhile, are expected to increase, including in the Gulf of Mexico.

TOP FIVE TRENDS

With respect to oil inventories, we expect a build in crude oil inventories in the first half and a draw in the second. A recession (or partial recession for those who insist on the official definition of a recession which is a decline in output for six months in a row) would make the second half less bullish because of the additional inventory build. As a result, oil prices are expected to be weak in the first quarter and continue to improve as we move toward the end of 2023. Absent any major political events, oil prices could hit $100/barrel and even breach that in the fourth quarter of 2023.