Could the Oil Price Crash in 2023?

Could the Oil Price Crash in 2023?
'Given the uncertain economic outlook, a major pullback in oil prices is a growing risk'.
Image by Sena Yigiter via iStock

A “major pullback” in oil prices is a growing risk, according to Joseph Gatdula, the Head of Oil & Gas Research at BMI.

“Given the uncertain economic outlook, a major pullback in oil prices is a growing risk, especially given the persistent inflation impacting markets globally,” Gatdula told Rigzone.

“A scenario in which inflation remains stubborn and rates continue to increase would undoubtedly put pressure on oil prices and could warrant the next leg down in prices,” he added.

Looking at the U.S., Gatdula said the Federal Reserve remains committed to taming inflation and warned that, should inflation continue to remain “sticky” to the upside, it would warrant further rate hikes.

“The uncertainty around rates is adding both upside (from those believe a reversal in hikes is due shortly) and downside to prices,” Gatdula told Rigzone.

“Although currently, the weak economic outlook is weighing on prices and expectations for a rebound is less convincing,” he added.

Gatdula warned that an additional risk to prices is a “shock” to the banking system resulting in tightened credit markets “that could also trigger a fall in oil prices”.

“A final drag on prices could be below expectation economic activity China, which remains a key tenet of the bullish narrative for oil prices,” he said.

“If China underperforms in 2023, oil demand expectations could be much lower, and, without supply reductions from producers, would see prices fall further,” Gatdula added.

Although the BMI Head noted that the company doesn’t preclude the probability that oil prices could crash, Gatdula outlined that the business sees two main mechanisms halting a major slide in prices.

“The first being the OPEC+ resolve at managing supply,” he said, adding that “the surprise production cuts in April only reinforce the ‘OPEC Put’”.

“Secondly, the U.S. has committed to refill the depleted U.S. strategic petroleum reserves. Recent guidance puts the U.S. on track to target a range for WTI of $67-72 per barrel which should in theory set a floor for oil prices, should it trigger the U.S. government’s purchasing process,” Gatdula continued.

Stephen Brennock, an Oil Analyst at PVM Oil Associates, told Rigzone he strongly doubts that oil prices will crash this year.

“Irrespective of the darkening demand outlook in the OECD, China’s resurgent appetite coupled with supply restraint from OPEC+ will ensure a price-supportive oil balance prevails in the coming months,” Brennock said.

“Should oil prices dip below $80 per barrel on a prolonged basis, you can bet that OPEC will act as a backstop by further reducing supply to ensure prices recover above this key threshold,” he added.

Brent’s highest 2023 close, so far, was registered on January 23 at $88.19 per barrel. It’s lowest 2022 close, so far, was seen on May 3, at $72.33 per barrel. At the time of writing, Brent is trading at $76.16 per barrel.

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