Oil stumble may be just a blip as markets tighten

Oil has kicked off the year on a negative note with prices falling more than 9% during the first two days to below the key US$80 per barrel mark.

The fall in the benchmark Brent Crude – currently at US$78.60/bbl – marks the worse yearly start since 1991 and could indicate that broader inflation has peaked and could fall rapidly according to Reuters.

Meanwhile, OANDA senior market analyst Ed Moya says that while oil is trying to rally, demand concerns have kept gains small.

“The Saudis are slashing prices as the short-term crude demand outlook seems like it won’t quite get a major boost from a robust China reopening,” he added.

Broker PVM Oil said oil is in a bear market with readily available Russian crude playing its part in the continuous move lower along with co-ordinated Strategic Petroleum Reserve releases.

“The question now is whether these forces will be at play throughout 2023 and whether the cheapening of oil prices will be the main theme this year,” it added.

The bull case

Eurasia Group is markedly more certain about where oil is heading, forecasting that oil will climb back up above the US$100/bbl mark as tight supplies meet growing demand.

The political research and consultancy firm said this is expected to fuelled by China’s faster-than-expected economic recovery following its sudden exit from zero-COVID policies along with a shallow recession in the US which is not expected to sink demand.

Markets Insider quoted Eurasia as saying that these factors will bolster demand growth for crude oil and expose an acute lack of new supply.

“Contributing to the problem are Russian production declines amid continued sanctions, low levels of OPEC+ spare capacity, reduced capital investment in non-OPEC production, and the absence of an Iran nuclear deal,” it added.

ING strategists added that while the oil market is looking better supplied in the near term, it expects the oil balance to show a tightening in the market from the second quarter through to the end of the year, which should increase prices from that point.