We still see higher crude oil prices over the next 12 months, but various factors have led us to trim our forecasts. In early September, we lowered our December 2022 forecast by USD 15/bbl. And we are now reducing our March, June and September 2023 forecasts by USD 15/bbl, expecting Brent to trade at USD 110/bbl and WTI at USD 107/bbl. Our December 2023 forecast is also set at USD 110/bbl for Brent and at USD 107/bbl for WTI.
Considering our positive price outlook, we reiterate our investment recommendations. With the oil futures curve downward sloped (in backwardation), and as we expect higher prices next year, we continue to advise risk-taking investors to add long positions in longer-dated Brent oil contracts. Alternatively, investors can make use of the lower spot prices and the high option implied volatility by selling Brent’s downside price risks over the next six months.
Due to years of underinvestment in new oil projects, and given the capital discipline of US shale producers, which limits the development of projects with short lead times, the oil market is set to remain tight over the coming years. Higher prices are therefore needed to incentivize supply and slow demand growth. However, the market is likely to be less tight than we initially expected for the next 12 months because of various headwinds.
The OPEC+ cut removes barrels from the market
OPEC and its allies (OPEC+) agreed to reduce their production cap by 2mbpd. With several member states such as Russia underproducing the lower cap, which is valid from November, we expect the group’s production to be around 1mbpd lower than previously thought, with most of the cuts delivered by Saudi Arabia, the UAE, and Kuwait. The group signaled it will keep production lower until the end of next year. But considering that we expect Russian crude production to fall next year and oil demand to increase, we expect the group, at one of its meetings in 2023, to agree to increase production again. While the OPEC+ Joint Ministerial Monitoring Meeting (JMMC) is scheduled to take place every two months and ministerial meetings only every six months, the group can call an extraordinary meeting if market conditions warrant it.
Risk scenarios
Upside risks to our forecasts include a large, long-lasting disruption of Russian crude production and destabilizing political events in oil-producing regions, such as Libya, Venezuela, Nigeria, and the Middle East, which could trigger a sharp drop in supply for a sustained period. A faster-than-expected oil demand recovery as mobility picks up in China and an even slower production response (i.e., increase) from the US would also be price-supportive.
Downside risks include a sharp price increase over the coming months due to large disruptions in Russia, which could trigger a recession. A deep recession or renewed extended mobility restrictions that weigh on the oil demand recovery are other risks. A hard landing of the Chinese economy in 2023 also poses a downside risk, as emerging Asia has been the engine of oil demand growth in recent years. Another concern is that capital discipline in the US could start to erode. Also, the return of disrupted oil production in Venezuela and Iran could weigh on prices.
Source: UBS