Crude Oil Outlook Q1 2023: WTI Crude Likely to Rise in Q1 on Tight Supply

This article was written by DailyFX analysts Richard Snow and James Stanley, sharing their crude oil outlook for the first quarter of 2023.

Focus on China’s policy easing and GDP forecast

Crude fundamentals will become more delicate for producers, most notably OPEC+, as deteriorating global growth forecasts are weighed against optimism from China’s new reopening measures.

Most forecasters, whether it’s the major central banks, the IMF, or any other large institution, expect GDP growth to be lower in 2023 because of the massive rate hikes that are expected to occur in the year. Higher interest rates remain crucial to keeping inflation down, but also discourage borrowing for expansionary projects and lower overall spending in the economy. In the first quarter of next year, major central banks should be nearing the end of their rate-hike cycle and start keeping rates higher until there is solid evidence of falling inflation or the economy struggles.

However, China’s recent easing of COVID-19 restrictions has brought renewed optimism to the world’s largest oil importer’s economy and overall economic sentiment, which may improve as a result. The table below shows estimates for oil demand growth and GDP from the Organization of the Petroleum Exporting Countries (OPEC), the Energy Information Administration (EIA) and the International Energy Agency (IEA), respectively.

Crude falls as central banks fight inflation

Aggressive action by central banks around the world, led by the Federal Reserve, to stem a surge in inflation has led to sharp downgrades to the benchmark economic growth outlook. Global GDP will grow just 2.5% next year, down from 3.6% in early March, according to a Bloomberg survey of economists.

During this period, the real yield on the 2-year Treasury rose from -3.01% to 1.77%. This is because monetary tightening pushes up nominal interest rates while lowering priced-in inflation expectations. That leaves the real cost of short- to medium-term borrowing not far behind the 2018 peak of 1.9%. This is the highest level since early 2009.

The rapid rise in lending rates has made it more expensive to finance all kinds of economic activities. It’s no surprise, then, that growth expectations have fallen sharply, which should weaken cyclically sensitive crude oil prices (albeit with a brief detour in early 2022 when Russia begins its invasion of Ukraine). The Fed has made it clear that it will continue to aggressively tighten monetary policy in the coming months, keeping these factors in play.

Global Oil Demand Growth and GDP Forecast to 2023

2023

OPEC

EIA

IEA

oil demand growth(million barrels/day)

2.25

*1.16

1.7

GDPincrease

1.50%

**1.3%

***3.6%

*according toEIAshort-term outlook

**According to the forecast of Oxford Economics

***Growth assumptions for 2019-2025 based on IMF World Economic Outlook

OPEC+ aims for further cuts in 2023, Biden seeks to complement SPR

OPEC+ continues on its current path, aiming to cut production by 2 million barrels per day in an attempt to restore market stability after oil prices fell more than 40% from their March highs. After the initial stimulus, WTI prices actually continued lower until early December. In OPEC’s latest monthly report for November, the group confirmed that real production in the 10-member group fell by 744,000 bpd, well below the 1.27 million bpd it made in a total cut of 2 million bpd /day share. So the overall supply cut does not appear to be as bad as originally thought, but this needs to be taken into account that Russian supply is expected to fall by 1 mb/d or more due to recent EU sanctions and the $60 price cap. In the first quarter, cumulative production cuts could support oil prices.

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Oil prices could be boosted after U.S. President Joe Biden said he was willing to forgo the sale of the Special Petroleum Reserve (SPR) and seek to replenish inventories. The Biden administration has previously mentioned that as SPR reserves fall to multi-decade lows, they tend to replenish inventories between $67 and $72. Total U.S. oil reserves have fallen by nearly 180 million barrels, according to the latest chart from the U.S. Energy Information Administration.

Weekly chart of U.S. SPR crude oil inventories

Source: EIA

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(Written by Richard Snow and James Stanley, translated by Eunice)