At the beginning of 2023, several factors are at play in determining the short and medium-term trend in oil prices this year.
Supply and demand concerns, tightening monetary policy globally, expectations of a material slowdown in economic growth and possible recessions, and China’s reopening with a Covid exit wave are all impacting crude oil prices.
During the first week of the year, oil prices tumbled by 9% in the first two trading days for the worst start to a year since 1991. The price of Brent Crude dipped to below year-ago levels for the first time in two years, possibly suggesting that “broader inflation has peaked and could fall rapidly in the coming months,” Reuters columnist Jamie McGeever notes.
The annual change in the U.S. benchmark, WTI Crude, has also turned negative several times over the past two months. The base effects, that is, prices and the inflation rate compared to the same time last year, are falling and could signal deflation in energy commodities, which could intensify the drop in broader inflation to closer to the Fed’s 2% target, according to McGeever.
Still, the Fed isn’t abandoning its hawkish stance and determination to fight inflation which is “persistent” and at an “unacceptably high level,” according to the minutes of the Federal Open Market Committee (FOMC) from the December meeting released this week.
“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time,” the Fed said.
“Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path,” according to the FOMC minutes.
This week, Federal Reserve Bank of St. Louis President James Bullard said that the prospects of a soft landing for the U.S. economy have increased compared to the autumn of 2022, thanks to a strong and resilient labor market.
“The policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer,” Bullard said in a presentation on Thursday.
Nevertheless, concerns about a recession persist. The current weak oil demand in both the U.S. and China adds to the immediate-term bearish outlook on oil prices.
“Oil is trying to rally but demand concerns are keeping the gains small.? The Saudis are slashing prices as the short-term crude demand outlook seems like it won’t quite get a major boost from a robust China reopening,” Ed Moya, Senior Market Analyst, The Americas, at OANDA, said on Thursday when oil prices inched higher after the massive selloff on Tuesday and Wednesday.
However, the weekly EIA report indicated that implied gasoline demand fell last week by the most since March 2020, and crude oil and distillate demand posted significant declines from a week ago, Moya noted.
ING strategists said on Thursday, “The oil market is looking better supplied in the near term and risks are likely skewed to the downside. However, our oil balance starts to show a tightening in the market from the second quarter through to the end of the year, which suggests that we should see stronger prices from 2Q23 onwards.”
According to broker PVM Oil, “There is no doubt that the prevailing trend is down, it is a bear market.”
“Readily available Russian crude also played its part in the continuous move lower and so did the co-ordinated SPR release. The question now is whether these forces will be at play throughout 2023 and whether the cheapening of oil prices will be the main theme this year.”