Oil prices have been choppy in early 2023, torn between China reopening optimism vs. fears of rising infections.
- Brent prices fell and rose by 8.5% in the first two weeks of 2023 as fears of surging COVID infections in China gave way to reopening optimism. Prices are up 0.9% so far this year.
- A relatively warm winter so far in Europe and lower natural gas prices have also weighed on sentiment as the new year began.
- Brent prices lost 25% in 2H22 on global recession fears, paring the full-year 2022 gains to just over 10%.
But we expect the energy problems of 2022 to persist in 2023.
- We see three-quarters of global oil demand growth in 2023 coming from emerging Asia as China, the world's second largest economy, rapidly reopens.
- OECD inventories are already at their lowest since 2004. The ending of its strategic petroleum reserves in 2022 is likely to lead to a faster drop in commercial inventories this year. Some OECD members may also start to refill.
- Russian production may drop, while non-OPEC+ supply growth, such as US shale, may be muted due to capital discipline.
So we remain most preferred on oil and energy equities.
- We expect the UBS CMCI Energy Total Return Index to have another good year in 2023, driven by strong performance in crude oil and oil products.
- We expect Brent prices to rise to USD 110/bbl and WTI to USD 107/bbl in 2023. We advise risk-taking investors to add long positions in longer-dated Brent contracts or sell Brent's downside price risks.
Did you know?
- The EU banned the import of Russian waterborne crude on 5 December, and will ban refined products by 5 February.
- OECD inventories are at their lowest since 2004, worsened by strategic reserve sales in 2022.
- Demand in India, the third largest consumer, is growing the fastest among major economies.
- Watch our Deep Dive video on energy security and opportunities (3:52).
Oil prices are likely to be supported by recovering Chinese oil demand, lower Russian production, and the end of strategic oil reserve sales by OECD countries with the potential for refilling. We maintain our preference for oil and energy stocks.
Main contributors - Patricia Lui, Giovanni Staunovo, Wayne Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Has the energy trade run its course?, 20 January 2023.