Crude oil prices have erased most of their 2022 gains and could fall

Tom Kaye of Plymouth, Pennsylvania fills his neighbor’s gas tank for them at a gas station in Wilkes-Barre, Pennsylvania, U.S. October 19, 2022.

Aimee Dilger | Reuters

Oil prices are defying expectations and are barely higher for the year, as the outlook for oil demand continues to deteriorate so far.

West Texas Intermediate Crude Oil Futures January price was just above $77/barrel in afternoon trade, after falling to $73.60/bbl, the lowest price since December last year. WTI is up more than 2% on the year, after turning negative early Monday.

Gasoline prices at the pump have also dropped significantly and could be cheaper than last year for many Americans around Christmas, according to an outlook from the Oil Price Information Service. On Monday, the national average was $3,546 per gallon of conventional unleaded fuel, down from $3,662 a week ago but still higher than $3,394 a year ago. according to AA.

‘Macro headwinds rather than headwinds’

China’s lockdown and rare protests against Beijing this weekend have raised more doubts about the outlook for the country’s already weakened economy.

“We think recession [forces] around the world, especially in the three largest economies, are dominating the macro environment for the whole year and we think the issues that we have identified as relatively difficult in the coming period will still,” said Ed Morse, global head of commodity research at Citigroup: “Right now, we’re looking at macro headwinds rather than headwinds.”

Morse is one of the more upbeat strategists on Wall Street in 2022, but he said the latest market developments and the impact on major economies makes his forecast even too optimistic. . He revised his outlook higher towards the end of the third quarter, building on OPEC+’s shift to focus on prices and pending debt. Europe bans Russian crude oil.

The oil market has focused on two potential catalysts for higher prices, but the impact on demand from a slowdown in China and new lockdowns has outweighed current supply concerns. European Union bans buying Russia’s seaborne oil transportation takes place on December 5. The EU is also expected to announce a price ceiling for Russian crude.

OPEC+ is also a factor. The group includes OPEC, plus other producers, including Russia. The group surprised the market in October when it approved a production cut of 2 million barrels per day.

“We’re waiting to see if they signal even deeper cuts. There are rumors in the market about that happening,” said John Kilduff, partner at Again Capital. After falling to an intraday low, oil rebounded on Monday as Speculation spreads about new OPEC+ cutshe say.

Brent futures contractby international standards, was lower on Monday at $83.11, recovering from $80.61 a barrel, the lowest price since January.

“Right now, the target is under $60 [for WTI]. That’s what the chart shows… this is a new low for the move as the previous year low was at the end of September and now we’ve broken that,” said Kilduff. It all depends on what happens in China. China is just as important on the demand side as OPEC+ is on the supply side.”

Higher oil prices next year?

Analysts expect oil prices to rise next year. JPMorgan predicts Brent oil prices will average $90 by 2023.

Morgan Stanley expects prices to be much higher again in the middle of the year after China ends its lockdown.

“Our balances suggest a modest oversupply in the coming months. Therefore, we first see Brent prices to fluctuate between the mid-80s and mid-80s,” the company’s analysts wrote. the highest of the 90s”. “However, the market is likely to return to equilibrium in Q2 2023 and supply shortages in the second half of 2023. With a limited supply buffer, we expect Brent to return to levels. ~$110/barrel by the middle of next year.”

Kilduff said he doesn’t expect OPEC+ to make a big impact on the market this year with production cuts, although it’s a wild card. Another factor that could push prices up is if the war in Ukraine escalates.

“I’m not too worried about OPEC+ cutting production just because of the fact that most countries won’t cut. Only Saudi Arabia will turn against each other,” he said. “Everyone has reached their quota. This is a game of numbers.”

Morse said market dynamics have changed and oil demand growth will be smaller as a percentage of gross domestic product. “We are seeing a significant slowdown in global growth,” he said.

China’s oil demand growth turned out to be much lower than expected. “We thought demand was slowing. It turned out to be significantly slower… We thought demand would grow by 3.4 million barrels this year,” Morse said. 1.7 million barrels”. He noted that European demand fell by several hundred thousand barrels and that of the US remained flat in 2022.

Morse said the decline in demand is also part of a larger trend, partly tied to the energy transition to renewables. “We’re also looking for a peak in oil demand this decade. That’s part of the longer-term story,” he said.

Influence of weather

Kilduff said La Niña’s weather pattern That has also affected prices, with warmer weather in North America. He and other analysts say it could continue to impact the market.

“We keep getting cold prospects, and then it fades. This is La Niña. You’re going to have cold days, but then you’re going to have nice stretches,” says Kilduff. He said concerns about winter heating fuel supplies had eased as supplies in Europe increased.

The result for consumers could be an unexpected fortune at the pump during the holiday season. OPIS expects prices to continue falling in January before rising again.

“If you combine the China protests with warm northern hemisphere weather, it’s a double-barreled attack on energy prices,” said Tom Kloza, global energy analyst at OPIS. at this moment”. He said he expects gasoline to average between $3 and $3.25 per gallon on the low end, but it will stay under $3 in many parts of the country.

By Christmas, the U.S. national average will be slightly below $3.28 last year, Kloza said.

Diesel prices have also fallen. According to AAA, diesel averaged $5,215 per gallon nationally on Monday, down about 8 cents per gallon from a week ago.

“We’ve built up a seasonal supply of reverse distillation fuel so that’s making things easier,” said Again’s Kilduff. “If the weather here is relatively mild, we’re going to lose the catalyst. that price increase and continue to decrease”.

–Michael Bloom contributed to this story.


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