The wide variations in oil price predictions by investment banks and rating agencies through 2022, ranging as low as $65 a barrel over demand concerns caused by a global economic recession, to as high as $380 a barrel on supply concerns over the Russia-Ukraine war and uncertain OPEC+ output, are prompting industry watchers to ask ‘how realistic these forecasts are?’
Earlier in July, analysts at JPMorgan Chase warned that if Russia cuts crude oil output in response to G7 sanctions, global oil prices might reach a 'stratospheric' $380 per barrel.
According to Bank of America, oil prices could surge higher or plunge lower depending on what happens next in global markets.
'Surging inflationary pressures from food to energy to services, coupled with fast-paced interest rate hikes, suggest oil demand will struggle to fully recover to pre-pandemic levels until next year,' the bank said, predicting that such a crash will cause prices to decline more than 30% from the current levels.
However, the bank warned that if European sanctions push Russian oil production below 9 million barrels per day (bpd), then oil prices could spike to $150 a barrel.
According to its latest forecast, Fitch Ratings predicted that Brent oil will average $105 per barrel in 2022 on expectations that Russian exports will come under increasing pressure in the second half of the year, as the EU approaches its partial import ban on Russian crude oil, effective Dec. 5.
The rating agency also forecasts that the price of Brent will stand around $100 per barrel in 2023.
The OPEC group, however, disagrees with Fitch, forecasting Tuesday in its monthly oil report that the conflict in Ukraine will not escalate further in the second half of the year and thus any changes in fossil fuel exports from Russia to Europe will not cause material energy shortages for the Euro-zone over that period.
Following suit, S&P Global Ratings forecasts that Brent will reach $106 a barrel for 2022 and $90 a barrel for 2023.
The US Energy Information Agency (EIA), in its July Short-Term Energy Outlook, said it expects Brent in 2022 to average $104 a barrel and almost $94 in 2023.
Bearish Citigroup cautioned that crude oil could collapse to $65 a barrel by the end of this year and slump to $45 by the end of 2023 if a demand-crippling recession hits.
-Prices on decline trajectory
Brent last week dropped below $98 a barrel from highs of above $120 a barrel only a month ago as fears of a looming recession spread among traders.
Ariel Cohen, director of Energy, Growth and Security Program at the International Tax and Investment Center (ITIC), pointed to several factors that are increasing uncertainty and driving market volatility.
Fears of economic recession, Russia’s oil flow disruptions and questions over OPEC+ output are contributing to these uncertainties, causing huge differences in oil price forecasts, according to Cohen, who is also a Senior Fellow at Atlantic Council.
Elaborating on Russian oil supply disruptions, Cohen said they occurred “because of the Russia-Ukraine war, the embargo from Europe and also problems of shipping out of the Russian ports, insurance issues and the use of ships that Western countries are trying to decrease or diminish when it comes to Russia.”
Of all the forecasts, Cohen believes that S&P Global Ratings’ forecast is among the most accurate, especially the prediction of $90 a barrel next year.
Cohen said prices were expected to continue declining after US President Joe Biden’s four-day trip to the Middle East including Saudi Arabia last week, during which Saudi Crown Prince Mohamed bin Salman said the kingdom will seek to increase its oil production from around 11 million barrels per day (bpd) to 13 million bpd.
“That will be a significant impact,” Cohen said.
The OPEC+ group is scheduled to hold its monthly meeting on Aug. 3 when they decide on the next month's output regime.
Cohen maintains that oil will always be available “that is not exactly on the books” even if OPEC agrees on a slow increase of production.
“There are always OPEC members who sell on the black market, through the back door. So, between all that, I see a further decline, but not dramatic, maybe to $85-$90 range, which historically, considering the dollar inflation, is not a huge price,” he said.
Cohen stressed that the extreme uncertainty and oil price volatility make it very hard to predict prices in the short term.
“We don't know how the war will continue. We don't know if there is going to be an escalation of the war, which would generate even more sanctions and secondary sanctions. We don't know if the war may stop, if the war comes to some kind of agreement, leading to more navigation to the Black Sea, because we also have concerns about the grain being exported. So, they may say okay, if you want the grain to grow, let our oil be exported from the Black Sea as well,” he said.
- ‘Not easy to deviate exorbitantly from $100 a barrel price level’
Dimitrios Makousis, a research analyst at Strategy International, envisages stronger demand expectations in the coming years, adding that people's post-covid eagerness to move, the reopening of the Chinese economy, and low inventories could all be supporting factors in 2022 and 2023.
Makousis argued, however, that a sharp drop to $45 a barrel does not appear likely for the time being.
“Although recession fears cause investors to hedge against risk and financial markets to stagger, it is not easy to deviate exorbitantly from the $100 a barrel price level,” he said.
While warning about intricate circumstances on the supply side, suggesting a supply shock could be on the way, Makousis noted severe implications, including “Libya's political crisis reigniting civil conflict with clashes, power cuts, and oil fields blockings; offshore oil rig workers strike in Norway; protests in Equador that might disrupt oil production; windfall taxes to oil and oil products that daunt investors; OPEC's low spare capacity and difficulty in boosting production --despite efforts made to that end-- and the tight refining capacity.”
In addition, Makousis said that uncertainty over the Ukraine war, the efficacy of Western sanctions on Russia, and Russia's ability to sustain production will play a decisive role in whether prices will stabilize at lower levels or if they will surge due to a potential outage --actual or artificial in the case of Russian oil supply weaponization.
Describing it as a 'war of attrition', Makousis said the power struggle between Russia and the West will test their resilience and the stability of energy markets.
Makousis underscored that other critical factors in play are the upstream investment degradation due to energy transition policies, taxation and environmental, social, and governance (ESG) requirements.
He believes that hostility toward oil companies may harm production and refining capacity “to the point where global system modification will be unable to reach the levels required to compensate for the loss of that supply promptly.”
“This factor, not some financial game or short-term disruption but a long-term strategy, should be seriously considered when designing energy transition policies,” he said.
By Sibel Morrow
Anadolu Agency
eenrgy@aa.com.tr