A forecast by the International Monetary Fund (IMF) that a third of the world’s economies are about to slide into a recession this year amid dismal Chinese growth prospects will continue to weigh on global oil demand and depress prices in 2023, according to economists and analysts.
A survey of 30 economists and analysts forecast Brent crude would average $89.37 a barrel in 2023, about 4.6 per cent lower than the $93.65 consensus in a November survey.
On Tuesday, Brent, the benchmark for two thirds of the world’s oil, was up 0.51 per cent to $86.35 a barrel after opening about one per cent lower while West Texas Intermediate, the gauge that tracks US crude, was 0.65 per cent higher, trading at $80.78 a barrel.
Brent averaged $103.70 a barrel in 2022, gaining about 10 per cent annually, after jumping 50 per cent in 2021, while WTI ended up about seven per cent last year, following a 55 per cent surge in 2021.
Osama Rizvi, energy analyst at Primary Vision, remains bearish on oil prices for 2023.
“The bearish factors have been piling up for a few months. A slowdown in China's economy will be the driving force in establishing a bearish outlook," he said. He said China's refinery utilisation rates are also lower than previous years, retail sales are down, credit impulse is lackluster, the congestion index shows no hope, while mobility in Beijing and Guangzhou remain 45 per cent and 35 per cent less than the previous year.
IMF’s managing director Kristalina Georgieva has said that the outlook for the global economy is quite grim and that 2023 will be tougher than 2022 because all the large growth engines will be depressed, including the United States, Europe, and even China — for the first time in four decades.
"For the first time in 40 years, China's growth in 2022 is likely to be at or below global growth," Georgieva said.
"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.
According to Daniela Hathorn, senior market analyst at Capital.com, the overall outlook for the first quarter is for oil to continue its bearish trend but at a reduced capacity, similar to what we’ve seen in fourth quarter of 2022.
“Looking ahead towards 2023, there are a few things to keep in mind. One, the US has confirmed it will start replenishing its Strategic Petroleum Reserves (SPR) at a price between $68 and $72, meaning there may be a further reason for support up ahead. Two, despite the reaction to the Chinese reopening trade being muted so far, the risk of recession is likely already discounted in the price of crude meaning there could be room for optimism in the first quarter of 2023 if the economic data shows more resilience than expected,” she said.
Bradley Saunders, assistant economist at Capital Economics, expects the world to slip into recession in early 2023 as the effects of high inflation and rising interest rates are felt.
Brent has fallen more than 15 per cent since early November and was trading around $84 a barrel on Friday as surging Covid-19 cases in China depressed the outlook for oil demand growth in the world’s largest crude oil importer.
“The oil market is still tight despite a weakening global demand outlook as recession fears run wild,” said Edward Moya, senior analyst with Oanda, adding that China will be the primary focus in the first quarter of next year.
Most analysts said oil demand will grow significantly in the second half of 2023, driven by the easing of Covid-19 restrictions in China and by central banks adopting a less aggressive approach on interest rates.
The impact of Western sanctions on Russian oil is expected to be minimal, a Reuters poll showed.
“We do not expect an impact from the price cap, which was designed to give bargaining power to third-country buyers,” analysts at Goldman Sachs said in a note.
"The market cannot expect a rapid recovery of the Chinese economy after three years of (pandemic controls), the mass bankruptcy of small and medium-sized enterprises, the soaring unemployment rate, the rapid increase in the social savings rate, and the rapid growth in the number of infections and deaths in recent months," a CMC Markets analyst was quoted as saying by Reuters.
However, some analysts believe that the impact of supply shortfalls caused by sanctions on Russia will offset the demand drop caused by darkening global economic backdrop and Covid-19 flare-ups in China.
ING, which recently published its oil price outlook for 2023, remained bullish. “A combination of lower Russian oil supply and Opec+ supply cuts means that the global oil market is expected to tighten over 2023. We expect a growing deficit over the course of the year, which suggests that oil prices should trade higher from current levels,” the group said.
“We currently forecast ICE Brent to average $104 per barrel over 2023, but the uncertainty around our forecast is high given the geopolitical situation and the direction of the global economy,” ING noted.
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