What is behind projections of falling oil prices?
Houston, U.S. | bazzup | Oil costs are declining. With numerous uncertainties still remaining, many experts now anticipate that the trend will last for the next two years.
Projected price declines
The average price of Brent crude oil was predicted earlier this month by the U.S. Energy Information Agency (EIA) to fall from 100.94 dollars per barrel in 2022 to 83.1 dollars in 2023 and 77.57 dollars in 2024.
In a similar vein, 30 economists and analysts participating in a Reuters 2022 year-end poll predicted that the benchmark price of Brent crude oil would average 89.37 dollars a barrel in 2023.
From 122.71 dollars per barrel in June to 80.92 dollars per barrel in December of the previous year, the monthly average price of Brent had already dropped by 34%.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, are working to revers the trend through their pricing power, but the market sentiment is thought to be caused by slower oil demand growth due to a weak global economic recovery and relatively ample non-OPEC supply growth to replace potential Russian production loss.
LESS SUPPLY LOSS, SLOWER DEMAND GROWTH
According to Abhi Rajendran, director of research at Energy Intelligence, a renowned provider of energy information, the continuous weakness of the oil market is “clearly driven by the demand side this time,” he recently told Xinhua.
According to the EIA, the worldwide demand for liquid fuels may only increase by 1% from 99.43 million barrels per day (b/d) in 2022 to 100.48 million in 2023 and by 1.7 percent to 102.2 million in 2024 due to obstacles to the global economic recovery.
On the supply side, according to the EIA, the world’s supply of liquid fuels will increase by 1.1 million b/d in 2023 and 1.7 million b/d in 2024 as a result of a production boom, particularly among non-OPEC producers. This increase is expected to make up for a projected 1.5 million b/d decline in Russian production due to sanctions.
Analysts have noticed that the most recent estimates of the EIA and OPEC for the loss of Russian production are substantially lower than the initial EIA estimate of 3 million b/d.
The sanctions were predicted by the EIA to cause Russia’s production of oil and other liquid fuels to fall from 10.9 million b/d to 9.5 million in 2023 and 9.4 million in 2024.
Russian oil production was predicted by OPEC to fall from 10.8 million barrels per day in 2021 to 10.2 million in 2024, a far lower decrease.
Despite the fact that Russia’s loss has so far been relatively small, experts warned that further sanctions could cause a larger decrease this year.
The European Union, the Group of Seven countries, and Australia agreed to a price restriction on Russian seaborne crude at $60 per barrel, which went into force last month. By as much as $30 per barrel, Russian crude has been trading at a considerable discount to Brent.
OPEC REGAINS POWER
OPEC+ nations, led by Saudi Arabia and Russia, have recently held frequent meetings to coordinate output adjustment in response to the rapidly shifting market conditions.
When the COVID-19 virus broke out in the world in April 2020, OPEC+ made the decision to reduce production by more than 7 million barrels per day, which led to a 26-month rise in the Brent price from then 18.38 dollars per barrel to 122.71 dollars per barrel in June of last year.
To the dismay of the Joe Biden administration, which was dealing with high inflation only one month before the 2022 midterm elections in the United States, OPEC+ once more decided in October to lower output by 2 million b/d in response to the three-month Brent price decline since June of last year.
According to Andrew Dittmar, an analyst at Enverus, a provider of energy software services, the circumstance gave the price of oil a “huge geopolitical premium” that the market had not experienced in a substantial amount of time.
According to estimates from the EIA, OPEC produced 34.18 million b/d of oil in 2022, or about 34% of the world’s total. OPEC predicted that its market share will rise to 39% by 2045 from its current level of one-third up to 2030.
Ahead are uncertainties
Experts have cautioned that it is very difficult to predict oil prices since there are now too many unknowns.
There are still questions about whether there will be harsher penalties on Russia’s oil exports, whether infrastructure problems and other roadblocks would slow down the rise in American oil output, and whether Venezuela and Libya will be able to increase their oil production as expected.
According to experts at S&P Global Commodity Insights, who released their 2023 energy outlook last month, the year 2023 is anticipated to signal the start of a global commodity market rebound, to which energy security and policy continue to be major concerns.
Energy markets will likely have a policy-driven future, which will increase unpredictability and volatility, according to Shin Kim, head of Oil Supply and Production Analytics at S&P Global Commodity Insights.
As for the global oil demand growth, “how China’s economy will recover in 2023 will be critically important,” Dittmar said.
The average monthly Brent price for the past decade has been around 74 dollars per barrel. Now it’s wait-and-see whether OPEC+ could use its market power to arrest the ongoing oil price slide.