Khaleej Times - Oil prices to hover around $90 a barrel on supply concerns

Vijay Valecha, Special to Khaleej Times October 16, 2022

Oil prices will hover around $90 a barrel despite global recession fear, cut in demand and growing supply concerns in the wake of looming European Union sanctions on Russian oil, experts say.

Analysts and energy experts see volatile oil market in near future and said crude prices will fluctuate on geopolitical tensions, Russia-Ukraine crisis, potentially tight supply due to US refinery maintenance and two million barrels per day production cut announced by the Opec and its allies.

“The fourth-quarter consensus estimate on Brent crude is reduced by $9.1 per barrel to $91.9 per barrel whereas the estimates for first and second quarter of 2023 are lowered by $6 and $3 per barrel to $90 and $92 per barrel, respectively, Junaid Ansari, head of Investment Strategy and Research at Kamco Invest, said.

Oil prices fell more than three per cent on Friday as global recession fears and weak oil demand especially in the world’s largest crude importer China. On Thursday, the International Energy Agency (IEA) cut its oil demand forecast for this and next year, warning of a potential global recession.

Brent crude futures dropped $2.94, or 3.1 per cent, to settle at $91.63 a barrel, while US West Texas Intermediate (WTI) crude futures fell $3.5, or 3.9 per cent, to $85.61. The Brent and WTI contracts both oscillated between positive and negative territory for much of Friday but fell for the week by 6.4 per cent and 7.6 per cent, respectively.

The energy market is still digesting a decision from the major oil producers to reduce output by two million barrel per day in December. Underproduction among the Organisation of the Petroleum Exporting Countries (Opec) and its allies means this will probably translate to a one million bpd cut, according to the IEA estimates.

Recession fear weighs

Ansari said oil prices once again trended downwards led by concerns related to the pace of global economic growth and a possibility of recession in parts of Europe.

“Crude oil future prices peaked at a five-week high level of $98.63 per barrel on October 10, 2022 after seeing consistent gains that came after Opec+ announced a larger-than-expected cut to its oil production. However, prices trended downwards after the US dollar reached a fresh 24-year high on expectations of higher-than expected rate hikes in the coming months as inflation continues to remain elevated,” he said.

In addition, he said a downward revision to world GDP growth rate by the IMF with a warning of increasing risk of a global recession also affected the trajectory in oil prices.

“On the daily chart, WTI – Nov 2022 has support at the 50-SMA of $87.06 and further down at $85.56. It has resistance at $88.23 and $89.34 per barrel respectively. However, Brent – Dec 2022 has support at $92.37 and $91.06, while it has resistance at $93.57 and $94.42,” Vijay Valecha, chief investment officer, Century Financial, said.

Demand outlook muted

He said global demand outlook remains muted, and the Opec slashed its daily demand growth forecast to 2.64 million bpd from 3.1 million bpd.

“Certain officials of the Biden administration are concerned their plans to cap prices of Russian oil may backfire in the wake of Opec+’s production cut. The plan entails keeping sufficient Russian supplies on the global market – enough to ward off another spike in oil prices across the world that is already battling high inflation.

“Nevertheless, backed by support from various EU allies, they are going ahead with the plan despite fears that it might infuse more volatility in the markets. Another obstacle is getting approval from all the member states of the European Union. Officials are also wary of potential retaliation from President Putin who said he won’t sell oil to nations that are complicit with the price-cap ploy,” Valecha said.

Interest rate tightening cycle

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said Opec did cut its oil production target by two million barrels per day.

“It was the biggest cut since 2020, it was expected, it saw a morose reaction by Joe Biden, who said it was ‘shortsighted’, but a well better enthusiasm than what I expected by the oil bulls.

The barrel of US crude ended the session 1.90% higher, yet, the 50-DMA offers haven’t been cleared just yet,” she said.

She said the oil bulls’ camp focus on the restricted output due to capacity contraints, the Opec’s push to keep prices high, the Russian threat that there will be less Russian oil due to the European sanctions that include a price cap on Russian oil, the gas to oil switch due to the Ukrainian war and the expectation that China will recover and demand more oil at some point.

The septics, on the other hand, point that Opec did announce a cut of two million bpd, but many Opec countries have been failing to meet their quotas recently due to capacity restrictions, and that in reality, the real impact of Opec decision should be a fall of less than two million bpd.

“And more importantly, the bears outweigh the fact that the world has stepped into an aggressive central bank tightening cycle, and that the recession worries, and prospect of lower demand should keep the upside in oil prices limited,” Ozkardeskaya concluded.