03.01.202311:03 Forex Analysis & Reviews: Lower oil prices for 2023

2022 was a year of increased volatility and market division for oil to those who buy from Russia and those who refuse it. Brent ended it at +4%, a far cry from the triple-digit gains at the beginning of the armed conflict in Ukraine. The trading range for the North Sea grades was $64–$139 per barrel, the widest since the 2008 global economic crisis. What's in store for oil in 2023?

Despite its rally at the turn of the year, Reuters experts are pessimistic, at least for the first few months of 2023. They lowered the median estimate of the average Brent price by 4.6%, from $93.65 in November to $89.37 per barrel in December. In 2022, the figure was $99. Such forecasts suggest that the downward trend in the North Sea variety is likely to continue. And there are justifications for this.

Dynamics of forecasts for Brent

The main reasons for the further fall in oil prices are the aggressive tightening of monetary policy, which will lead to a recession, and the difficulty of opening China's economy in conditions of increased infection and mortality. According to the head of the IMF, Kristalina Georgieva, the simultaneous slowdown of three whales, the United States, the eurozone, and China, indicates that a third of the world economy will face a recession in 2023. In the language of fundamental analysis, this means lower oil demand and lower prices.

The fact that China is having a hard time fighting COVID-19 is evidenced by the slowdown in December manufacturing activity from Caixin from 49.4 to 49. The index has been below the critical mark of 50, which signals a contraction in GDP for five consecutive months.

As for potential production cuts that could support Brent, Reuters experts do not expect any breakthrough in this area in the new year. In their opinion, the Western sanctions will have a limited impact on the Russian oil supplies, as the process of reorientation of its flows from the West to the East is under way, and the price ceiling of $60 per barrel is too high to speak about a sharp reduction of the oil production in Russia. Thus, the main grade Urals currently trades at $42, including due to high transportation costs.

Dynamics of offshore flows of Russian oil

In addition, if Russian oil production drops sharply, OPEC may increase it to limit the rise in prices.

However, in the second half of 2023 the situation might change dramatically. The recovery of the Chinese economy will inflate the oil demand. As, however, the termination of the cycle of tightening monetary policy with a potential "dovish" reversal of the Fed.

Technically, the implementation of the 1-2-3 pattern takes place on the Brent daily chart. We keep the long positions formed due to this, but as we approach the previously announced targets of $86.4, $87, and $89.2 per barrel, we fix profits and look for signals for a reversal.