As the US inflation number has surprised all and sundry, rate hike expectations by the Fed have gone up too. This has weighed on global commodity prices, of which oil feels the most heat, having come down from the multiyear high of $127/bbl months earlier, to $97/bbl. Predictions are plenty out there – from as high as $380/bbl to as low as $65/bbl from the likes of JP Morgan and Citi Group.
As Biden is all set to make his all-important Middle East visit, punters are hoping the USA administration will do enough to get Saudi Arabia and UAE doing their best bits to lower oil prices.Covid fears, as have been seen numerous times in the last two years, are never too far away. The rise in Covid cases in China has given more hopes to the bears, as oil demand growth has heavily relied on China in the last decade or so.
While prices may still continue to face downward pressure, it may not be a sustained one. Opec’s first demand outlook for 2023 sees average oil demand to rise by 2.7 million barrels/day. This is higher than earlier forecasts by other agencies such as IEA. The supply side dynamics have not changed drastically, ever since the Opec Plus group started to unwind production at a faster pace – adding 0.65 million barrels – higher by 50 percent from the earlier planned increase.
The oil demand growth projection means the “call on Opec crude” would rise to 32 million barrels per day by the end of next year. This is where concerns around Opec Plus’s ability to keep pace with demand growth have rebounded. The supply needed to balance the demand is close to all estimates of Opec’s maximum production capacity.
The imbalance next year could be bigger than 2022, especially if worries surrounding China subside. Mind you, 103 million barrels a day, is not a bullish high-growth demand scenario. Oil production from non-Opec members, meanwhile, is expected to grow by 1.7 million barrels per day. This will require Saudi lead Opec Plus to pump more than 30 million barrels per day during 2023.
Demand varies throughout the season, and peak demand could require Opec Plus to ramp up production to as high as 32 million barrels per day. That is 10 percent more than the cartel’s last month’s production – which is a multitooth high. Catering to the projected demand is expected to bring the carte’s much talked about the spare capacity to razor-thin levels. The market is expected to stay tight, and it does not factor in an escalation on the Russia-Ukraine front. All in all, the bear run could be short-lived, and the era of high oil prices could well be here to stay.