[2023 Economic Outlook] Oil Prices Expected to Plunge to the $40 Range... Uncertainty Grows

[Image source=Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina, Reporter Lee Hyun-woo] The long-standing trend of high oil prices throughout this year has been broken amid concerns of an economic recession next year, with international oil prices plunging to the lowest level of the year in the $70 range, drawing attention to the future direction of oil prices.

Following Chinese President Xi Jinping's recent visit to Saudi Arabia, the issue of the 'Petro Yuan (yuan-denominated oil settlement)' has come to the forefront, along with the European Union's (EU) price cap on Russian oil, creating many variables that could shake oil prices and increasing uncertainty. Experts' oil price forecasts fluctuate between $40 and $100 per barrel, indicating that future volatility in international oil prices is expected to be very high.

◆ Diverging International Oil Price Forecasts for Next Year

On the 13th (local time) at the New York Mercantile Exchange, January West Texas Intermediate (WTI) crude oil closed at $75.39 per barrel, up 3.03% from the previous session. At the London International Futures Exchange (ICE), February Brent crude was recorded at $80.68 per barrel. International oil prices, which surged to around $130 per barrel in March due to Russia's invasion of Ukraine, have shown the lowest levels of the year in the second half amid simultaneous tightening measures and recession concerns.

Major institutions have issued conflicting oil price forecasts ahead of the new year. Bank of America (BoA) expects Brent crude to trade at an average of $100 per barrel next year, reaching $110 during peak season, supported by the implementation of the Russian oil price cap and China's demand recovery. Goldman Sachs also anticipates prices reaching $110 per barrel due to additional production cuts by oil-producing countries to halt the decline. On the other hand, the U.S. Energy Information Administration (EIA) recently lowered its forecasts for WTI and Brent crude next year to $86.36 and $92.36 per barrel, respectively, each down about 3% from previous estimates. Additionally, a Reuters survey of 38 economists last month showed an average WTI forecast of $87.80 for next year.

Some also present a sharp decline scenario. Eric Robertson, Chief Strategist at Standard Chartered (SC) Research, analyzed that global financial conditions could change drastically next year, causing Brent crude to plummet to the $40 per barrel range. He suggested that if the Federal Reserve's tightening leads to a more severe U.S. recession than expected and China's economic recovery is delayed, oil demand could be severely impacted, resulting in such an outcome.

◆ "Facing Three Key Questions" Growing Uncertainty

The current market views recession fears and prolonged tightening by major countries as downward pressures on oil demand, which could suppress oil prices. The recent decline in oil prices has also been driven by these concerns. BoA predicts that if a global recession materializes, worldwide oil demand could decrease by more than 640,000 barrels per day, continuing the downward trend in prices.

Conversely, factors such as China's easing of COVID-19 restrictions and resumption of economic activities, large-scale production cuts by oil-producing countries including the Organization of the Petroleum Exporting Countries (OPEC), and inventory depletion in the U.S. are seen as potential drivers pushing oil prices up. In particular, as China has recently begun to ease some pandemic controls to calm public unrest, expectations have grown that economic reopening is one step closer. This is anticipated to be a stronger driver of international oil price increases than any other variable. The oil-producing countries' coalition 'OPEC+', including OPEC and Russia, continues its policy of cutting production by 2 million barrels per day.

Meanwhile, the European Union (EU) and the Group of Seven (G7) countries have implemented a price cap on Russian oil, and the impact of this measure is critical. Russia, a major oil producer, has warned that such actions increase uncertainty in the international crude oil market and could lead to price rises. It has even threatened to reduce supply altogether. Depending on how much Russia's warnings materialize, the direction of oil prices is expected to vary.

Frank Schallenberg, Head of Commodity Research at LBBW, stated, "The oil market is facing three questions: Will Russia reduce oil supply due to the price cap? How will oil demand change amid a slowing economic outlook? And how quickly will OPEC+ implement production cuts?"

◆ The Full-Scale Emergence of the ‘Petro Yuan’ System as a New Variable

Beyond economic factors, China's strengthening political influence in the Middle East is emerging as a new variable affecting international oil prices. Especially following President Xi's visit to Saudi Arabia from the 7th to the 9th, the previously abstract concept of the Petro Yuan system is expected to become more concrete, potentially fracturing the existing Petro Dollar system.

According to CNN, during the first-ever China-Gulf Cooperation Council (GCC) summit held on the 9th, President Xi reportedly requested Middle Eastern oil-producing countries to settle oil and gas transactions in yuan. Until now, Saudi Arabia and Middle Eastern oil producers have traded oil exclusively in dollars in exchange for U.S. security guarantees, and this 'Petro Dollar' system has supported the U.S. dollar's hegemony. However, as Saudi Arabia's largest oil customer shifts from the U.S. to China, significant changes are expected in the dollar-centered international oil market.

Middle East political and economic commentator Ali Sihabi told the Wall Street Journal (WSJ), "Saudi Arabia will not abandon the 'Petro Dollar' in the near term, but if China maintains significant influence as Saudi Arabia's largest customer, Saudi Arabia will ultimately find it difficult to refuse yuan settlements."