Mixed Future for Oil, Though Prices Still Painful

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Crude oil prices are under the influence of a possible global recession as well as tighter supplies, though triple-digits still seem likely, analysis finds.

Brent crude oil, the global benchmark, was trading at $87.97 per barrel as of 8 a.m. EST Monday, up around 2.8% on the day. A rally was largely a given due to the weekend decision from OPEC+--the Organization of the Petroleum Exporting Countries and their non-member state allies, including Russia--to stick with its October policy of trimming 2 million barrels per day from collective output.

The cuts are likely much less severe than that, given that only a handful of members of the OPEC+ group can meet their quotas in any event, but given the looming supply-side fears triggered by the war in Ukraine, the market is bound to react.

Fitch Solutions Country Risk & Industry Research in a report published in part by Rigzone estimated that Brent will average $102 per barrel for 2022 and dip to $95 per barrel next year.

"Globally, prices are being torn between constraints on the supply side and a weakening outlook on demand, as the macroeconomy deteriorates," the report read.

Before the OPEC+ decision during the weekend, meanwhile, analysts at Swiss investment bank UBS (NYSE:UBS) expressed surprise that crude oil prices weren't yet at the $100 mark. Commercial crude oil inventories for the 38 members of the Organization for Economic Cooperation and Development (OECD) are at their lowest level since 2004 and, starting this week, members of the European Union will stop taking in waterborne crude oil from Russia.

UBS is looking for Brent to linger in the $110-per-barrel range next year, bullish against the forecast from Fitch.

In general, economic conditions are mixed. Inflation in the U.S. economy is cooling off and hiring remains robust, though China, the second-largest economy in the world behind the United States, is facing a real challenge in its COVID-19 containment strategy.

OPEC economists in their latest monthly report left their global growth forecast unchanged at 2.7% this year and 2.5% for 2023. The outlook for the U.S. and European economies remained the same, with only tepid growth expected for next year. The only major economy facing significant headwinds is Russia, which should see a 5.7% contraction for 2022 and growth of only 0.2% for next year.

Oil demand, meanwhile, was revised lower for both this year and next.

"Oil demand growth is anticipated to be challenged by uncertainties related to economic activities, COVID-19 containment measures and geopolitical developments," OPEC economists wrote.

Fitch, OPEC and UBS were all aware of the upcoming price cap on Russian crude oil and the moratorium on waterborne crude at the time of their forecasts, but sentiment seems mixed.

Russian cheating is all-but certain, but global flows may have already adjusted. Nevertheless, prices will only continue to create problems for the global economy regardless of which forecast is accurate.

The rally had faded by mid-day Monday, though the OECD in its latest outlook said the added costs associated with higher energy prices could push the global economy into a recession.

"The rapid rise in estimated OECD-wide energy expenditures this year, to around 17% of GDP, is a warning signal about the near-term risk of widespread recessions among OECD economies," its report read.

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) 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 over 200,000 current and future projects worth $17.8 trillion (USD).