Oil Prices are More Likely to Rise Than Fall, Analysts Say
The black gold market is rocking against the backdrop of the war in Gaza, anti-Russian sanctions and the weak recovery of leading economies.
By the end of the year, the world may experience an oil shortage, the International Energy Agency predicts. At the same time, there is a “swing” in oil prices in the markets. Read about what leading energy powers and investors can expect in such conditions in the collection of the Devon Information Agency.
What is the geopolitical risk premium?
The mood in the oil market has changed since the end of October, says an article by Finam.ru columnist Maria Babanova. Prior to this, prices for “black gold” showed steady growth. Analysts had been predicting a return to $100 and even $150 a barrel Brent as record demand for the fuel and Saudi Arabia’s supply cuts depleted global supplies.
The risk of a sharp rise in prices has also increased the conflict in the Middle East. However, an explosive rise in prices did not happen, as weak economic signals soon appeared from China, the USA and Europe. And the interruptions in oil supplies from the Middle East, which the market feared, did not occur.
As a result, the geopolitical risk premium gave way to a noticeable correction. Over the past three weeks, Brent quotes have lost about 12% in value. In particular, over the past week, quotes dropped by almost 4%.
The OPEC report released on November 13, which showed a shortage of raw materials, significantly cheered up the oil market. An additional stimulus for growth was the release of reports from the International Energy Agency. The IEA raised its estimate of oil demand growth from 2.254 to 2.367 million barrels.
Another factor of pressure on oil prices may soon be added. Iraq expects to reach an agreement with the Kurdistan Region government and foreign oil companies to resume oil production in the oil fields of the Kurdish region as early as this week.
The factor of uncertain economic prospects for the United States, China and the European Union also plays an important role. The US Energy Information Administration (EIA) said last week that US oil production this year will rise slightly less than previously expected. At the same time, demand will fall. Next year, gasoline consumption in America could fall to its lowest level in twenty years.
And China is also in the spotlight, where high hopes were pinned on demand growth this year. Oil imports to China remain consistently high. However, consumer prices there have fallen to their lowest level in recent years. This calls into question the effectiveness of the country’s economic recovery.
The market is waiting for the Arab embargo.
In addition, Chinese oil refineries requested a reduction in supplies of raw materials from Saudi Arabia in December, noted Finam FG analyst Alexander Potavin. He concludes that it will be possible to see a natural correction in oil prices. The leading OPEC+ countries will probably react to it.
They may extend their production restrictions until early 2024. For this reason, Brent quotes are likely to find support in the area of $78.5-80. And there we can expect a new wave of price increases, the expert emphasizes.
The optimal price level, from the point of view of key oil-producing countries, will be $80-90 per barrel of Brent, says Alexander Bakhtin, investment strategist at BCS World of Investments.
“OPEC+ can take advantage of the option to extend voluntary cuts,” he said. – China, implementing a number of fiscal measures to stimulate the economy, can increase GDP growth rates. The positions of commodities (exchange commodities – approx. Devon News Agency) may also improve in the event of signals for a easing of the monetary position by the world’s central banks.”
“If conditions improve, Brent quotes could quickly rebound closer to $90 and spend the rest of the year at these levels,” Bakhtin explained.
At the same time, the conflict between Israel and Palestine cannot be written off.
At the end of October, the World Bank assumed that Brent prices would rise to $157 in a month if other countries were drawn into the war between Hamas and Israel. And Fitch believes that quotes will rise to $120 in 2024 and $100 in 2025.
“A potential embargo by the Arab oil-producing world on the sale of hydrocarbons to Israel and countries supporting it could lead to a sharp rise in prices,” says Digital Broker analyst Natalia Pyryeva. “But for now the market is neutralizing the risks associated with the escalation of the Palestinian-Israeli conflict.” Her forecast is $90 per barrel, including due to increased demand for petroleum products in winter.
Will the “price ceiling” crush us?
Another factor is Russian supplies. On the one hand, Russia, which is subject to the Western embargo, benefits from high oil prices. In this regard, the promise made earlier by the Russian Federation to continue reducing supplies looked logical. On the other hand, analysts see an increase in Russian exports. This increases the pressure on the market.
Perhaps Russia does not seek to fulfill its promises for the reason that its oil is not sold anywhere below $60. The Reuters news agency writes that Russia manages to almost completely circumvent the US price restriction on oil sales. Recently, 100 sea vessels were suspected of violating sanctions. Notifications about this were sent to companies in 30 countries.
It is possible that soon these “loopholes” will be closed. And in addition to this, the European Commission will impose new sanctions against Russian oil as part of its 12th package. The new measures are expected to affect the “ceiling” of prices and circumvention of already imposed restrictions.
“As for the potential impact of Western sanctions, it’s worth waiting for the details first,” says Bakhtin. – The demand for Russian raw materials in the world remains high, as does Russia’s role in the global energy market. It is possible that the initiators of new restrictions, like most of the previous ones, will face difficulties in their implementation in practice.”
“Russian oil exports largely no longer depend on Western companies,” said Sergey Kaufman, an analyst at Finam. – In this regard, we believe that it will be difficult for the EU to achieve a reduction in prices for Urals below the “ceiling”.
But do not hope that Russia’s oil and gas revenues will not suffer. “Taking into account the decline in oil prices from $82 to $68, oil and gas budget revenues may decrease by 15-20% in the 4th quarter,” Potavin adds. “And this is taking into account a stronger ruble.”
Russian oil companies themselves will continue to feel confident. This will be facilitated by the return of the oil damper, Pyrieva notes. LUKOIL (LKOH) shares look particularly promising on the market now.
Oil will rise rather than fall.
In November, Russian Deputy Prime Minister Alexander Novak announced that our country will continue to voluntarily reduce the supply of oil and petroleum products by 300 thousand barrels per day until the end of 2023. In addition, Russia in March began voluntarily reducing fuel production by 500 thousand barrels per day.
Russia last month reduced the export of oil and petroleum products by 70 thousand barrels per day – up to 7.5 million. Federal budget revenues from fuel supplies abroad decreased by $25 million (to $18.34 billion) amid a decline in world prices. At the same time, production increased slightly in October, amounting to 9.53 million barrels per day.
The decline in oil prices had a greater impact on profits than the reduction in the discount on the Russian grade of Urals oil to Brent. At the same time, oil supplies turned out to be higher than in September, and oil products decreased, according to the IEA report.
BitRiver Communications Director Andrey Loboda called a shortage of oil in the world in the fourth quarter possible. The demand for fuel in the world exceeds its supply, the economist explained.
Demand is increasing due to India and China. They are increasing fuel consumption after the coronavirus pandemic. The lack of investment in new projects for the extraction of raw materials also leads to a further increase in demand.
The deficit is already gradually appearing, even taking into account the US efforts to extract oil. Russia and Saudi Arabia intend to keep fuel prices in the range of $85-95 per barrel of Brent, said Igor Yushkov, a leading analyst at the National Energy Security Fund.
According to Yushkov, Russia benefits from the Brent barrel range of $80-90. Oil prices have been rising since the summer. The price of a barrel of Brent rose from $76 to $90. But recently it has dropped to the level of $80.
“Saudi Arabia makes up the budget based on $85-86,” the analyst said. – The USA is also satisfied with this bar. In 2024, the world economy will recover. This will mean an increase in energy consumption, so oil prices will be high. But Russia and Saudi Arabia, in case of ultra-high prices, will begin to bring additional volumes of fuel to the market.”
If there are revenues in the budget, there will also be funds in the National Welfare Fund. This is the main “cup” of Russia. The state uses it to implement large national projects when there is not enough money in the treasury, Loboda added.
