Analysts at UBS recently described 2023 as the year of inflections as the economy emerges from one of its most difficult periods in modern times. In 2022, interest rates surged globally – well apart from China and Japan. Inflation surged, airline chaos reigned, and Russia invaded Ukraine. 2023 could also be an inflection point for Brent crude oil prices as China reopens and supply rises gradually.
In their oil outlook for 2023, UBS analysts argued that oil will come on top of natural gas and thermal coal. They are not alone. In their oil price forecast, analysts at JP Morgan predicted that oil will remain above $90. Other analysts at well-known firms, including Goldman Sachs’s Jeff Currie believe that oil prices will remain above $90 in 2023 and even move to $100.
There are several reasons for oil bulls to be optimistic. First, China, the biggest economy in the world by population is reopening its economy. And in its report last week, EIA said that oil demand will soar to the highest point in a decade in 2023. As usual, the report cited the rising demand from China.
Second, oil prices will benefit from the actions by the European Union, which is set to impose additional import restrictions of Russian oil. This ban follows the implementation of the Russian oil price cap. Europe has also proposed lowering this cap further even as the Biden administration balks.
Therefore, the oil market is caught in a situation where demand is rising at an unprecedented phase while supply constraints remain. A positive part in the supply side of the equation is that Nigeria is boosting its production while Venezuela is making a slow comeback. Chevron has already started pumping oil from the country. Iran is also seeing an increase in oil shipments as the country targets about 1.4 million barrels per day.
Another possible catalyst for Brent crude oil price is the recently published CoT report. Broadly, the speculative oil net positions has been in a strong downward trend after peaking at 690k in 2018. It currently stands at 239k. On the other hand, as shown below, commercial buyers shown in blue have been drifting upwards. These ones are important in the oil market because they are well aware of the products they produce.
Taken together, what does all this mean? To answer this, we need to look at the weekly candlestick chart. I think it is the one telling the real story on oil prices. This chart has been in a downward trend since peaking in 2022. As it dropped, it has formed a descending channel, which has a close resemblance to a falling wedge pattern. The lower side of this channel was at $75.
It has now retested the upper side, which it last tested on November 7 and June 13. As such, if bulls can advance above this channel, it means that the outlook of crude oil prices has brightened. That could see it rise to about $100 in the coming days. Crossing the $100 level will then bring $120 to view in short notice.
The alternative scenario is where Brent crude oil price comes under selling pressure and retests the lower side of the channel. Watch the video below, comment and share.
This post was last modified on %s = human-readable time difference 05:20