Brent crude prices reached a closing high of USD 128/bbl last year following Russia’s invasion of Ukraine, but declined by 25% in the second half on global recession fears, paring the full-year 2022 gains to just over 10%. Still, investors with a long position in Brent at the start of the last year made nearly 30% in performance thanks to roll gains.
We continue to believe that the energy problems of 2022—like redirected Russian supply and chronic underinvestment in upstream capacity—are likely to persist in 2023, and we expect crude oil prices to rise to USD 110/bbl this year.
2023 oil demand will be driven by Asia. In 2023, we expect oil demand to rise by 1.6 million barrels per day (mbpd), with demand exceeding the record of 103mbpd in 2H23. While oil demand growth last year stemmed largely from OECD countries, we expect this demand to be weak this year. On the contrary, we see three-quarters of global oil demand growth in 2023 coming from emerging Asia (+1.2mbpd). China, the world's second-biggest consumer, is rapidly reopening its economy. This should result in strong year-over-year demand growth, even though the reopening is likely to be bumpy in the near term with occasional setbacks.
OECD countries to restart refilling their reserves. The ending of more than 1mbpd of oil sales from OECD strategic petroleum reserves in 2022 is likely to lead to a faster drop in commercial inventories this year. OECD inventories (commercial and strategic) are already at the lowest level since 2004. Unless the International Energy Agency coordinates another global release, the US has already indicated it will slowly start refilling its reserves with a purchase of 3mn barrels, following a sale of more than 200mn barrels in 2022. Some OECD member states in Europe and Asia may also follow suit and refill their tanks to meet the obligation of holding emergency oil stocks equivalent to at least 90 days of net oil imports. This will add further to the global demand for oil.
Russian production may drop, while non-OPEC+ supply growth may be muted. On the supply side, the US should lead production growth outside of OPEC+ in 2023. But the additions will likely be smaller than in the past, as the supply response from US oil producers with short lead cycles (i.e., shale oil) to higher prices is different now than in the past. Shale producers are more focused on capital discipline today instead of increasing production growth. Another limiting factor is the fast rise in costs due to elevated inflation, a tight US labor market, and other supply chain constraints.
Meanwhile, the European Union’s ban on Russian crude imports in December has weighed on this supply. Despite a wide discount for Russian oil relative to Brent, we did not observe a massive pickup in imports of Russian barrels from Asian customers such as China and India. With the EU ban on refined products from Russia coming into force on 5 February, it will become more challenging for Russia to find buyers to compensate for missing European demand.
So, 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 the price of Brent to rise to USD 110/bbl and WTI to rise to USD 107/bbl in 2023. We advise investors with a high risk tolerance to be long Brent crude oil via first generation indexes or longer-dated oil contracts, or to sell Brent’s downside price risks.
Main contributors - Mark Haefele, Giovanni Staunovo, Patricia Lui, Vincent Heaney, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Oil set to rebound in 2023, 4 January 2023.
