The Brent crude oil is headed towards fourth straight month of decline, unless signals from Russia, the Opec partners, African producers and China have more to say. Inn a rather surprising development, the Opec+ group maintained its earlier projection for demand growth in 2023 – expecting it to reach pre-pandemic growth levels.
This has been viewed with skepticism amongst many market observers, calling it a desperate attempt to offer erroneous bullish signals to a market that stands to face a stern test, in the wake of impeding global recession fears.“Oil demand in 2023 is expected to be supported by a still solid economic performance in major consuming countries, as well as potential improvements in Covid-19 restrictions and reduced geopolitical uncertainties,” said the latest report from the leading cartel.
Recall that Opec Plus which includes Russia – is falling 3.6 million barrels per day of its production target. This makes around 3.5 percent of global demand, which is a record high for production shortage reported in the last three decades. The market remains tight from the supply side, and that has been the case for quite some while, despite demand disruption fears growing every single day.
Russia is set to make further advances in Ukraine and that could hasten the process of energy sanctions from the European Union, which could take more crucial barrels out of the equation, even if for a brief period. Russia’s troop mobilization is being viewed as a bullish factor as it raises the prospects of a prolonged war, adding to the risk premium.
Early signs from China also show a resurgence in demand, as the Covid shutdown impact subsides. Chinese state-owned oil refineries are believed to be considering 10 percent higher throughput in October from previous month, with an even stronger surge expected in last quarter of 2022. News emerging from the US ruling out an immediate breakthrough in the Iran nuclear deal, is also expected to keep the bulls interested.
On the other hand, bears are not bare-handed either, as a lot is going on in their favor as well. The US Fed is expected to raise the rates significantly, as street consensus emerges of a 75-basis point increase. In a balance market, this piece of information alone could have sent shockwaves, as fears of a global slowdown will further increase following another Fed hike. The US oil inventories are also running at multi-month high, which is another bear signal. But the market is far from balanced, and as winter approaches and countries in the West start running from pilar to post for heating needs – the imbalance may well tilt more towards the bulls’ favour.