'Known, Unknown' Factors Roil Oil Prices, Frustrate Forecasters

---

Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Ongoing concerns about global economic conditions prompted the U.S. government to drastically cut its forecast for crude oil prices, something of an outlier against calls for $100 crude oil.

The outlook from early 2022 onward was that the price of crude oil was entering a higher-for-longer scenario, given the war premium emanating from the conflict in Ukraine. Russia before the war was a major global supplier of everything from grains to natural gas and crude oil, and the loss of those barrels from Western-imposed limits to self-sanctioning led to significant strains on the supply-side of the energy equation.

In its short-term market report for July 2022, the U.S. Energy Information Administration (EIA), the statistical arm of the Department of Energy, figured the price of Brent crude oil was averaging around $110 per barrel and would linger in that range for the better part of the year, before falling to an average of $97 per barrel in 2023.

At the time, the EIA was forecasting a 2 million-barrel-per-day (BBL/d) loss of Russian crude oil and was hinting of a ban on waterborne crude oil from Russia. At the same time, there were concerns that major energy companies were favoring shareholder returns and bloated profits over new investments upstream.

All that, EIA said, made for major supply-side challenges.

"Current oil inventory levels are low, which amplifies the potential for oil price volatility," EIA's report from July said.

That volatility really wouldn't come into play until later in the year, after Western powers shunned waterborne crude and eventually imposed a $60 cap on Russian crude oil. By February, most major economies likely will be taking in no Russian products at all.

Based on the July report from the EIA, it's no wonder many major banks spent much of last year calling for a return to $100 crude. Swiss investment bank UBS, Goldman Sachs and Germany's Commerzbank are all expecting the price of crude oil to return to triple digits, from current levels of about $82 Brent.

Forecasting Brent at $110 for 2023, UBS said the problems that plagued the energy sector last year--underinvestment in upstream and Russian-rooted supply challenges--"are here to stay." Couple that with China easing back on the tight social restrictions meant to curb the spread of the novel coronavirus that causes COVID-19, and the future looks decidedly bullish.

But all that comes amid concerns about a global economic recession. Kristalina Georgieva, the managing director of the International Monetary Fund, started the new year by saying one-third of the global economy will enter recession this year, with Europe getting hit particularly hard.

On Tuesday, it was the World Bank's turn: Global economic growth was revised down from the 3% estimate six months ago to 1.7%, while the U.S. economy is projected to grow by only 0.5% and the European Union will see no growth at all.

China, the second-largest economy behind the United States, can expect 4.3% growth for 2023, though that represents a 2.9% revision lower than the previous World Bank estimate.

Most of the emphasis among those betting on $100 crude is on China. The U.S., which is taking a good chunk of Russia's market share in Europe, is by some estimates slowing down in terms of production growth. Meanwhile, UBS believes the supply-side pressures that began last year will remain.

Markets, however, are fluid. No longer, for example, does the market move on word of conflict in Libya as it once did, and rig counts don't influence the price of oil like they did in the 2010s.

Data supplied from London oil broker PVM show Europe has managed to diversify its supply away from Russia by relying on Saudi Arabia, Norway and even Guyana, one of the newest players in crude oil.

PVM estimates European imports of Russian crude oil declined from 3.2 million to 650,000 BBL/d in December.

The EIA seems to be taking something of a cautious approach to its forecast for crude oil prices, lowering its estimate for Brent by nearly $10 per barrel from the previous month's report to $83 per barrel for 2023.

That said, forecasting is akin to turning lead to gold so we may have to turn to the late Donald Rumsfeld for wisdom on the future of oil prices.

"As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know" he said. "But there are also unknown unknowns--the ones we don't know we don't know."

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).