Last year looked topsy-turvy in terms of crude oil prices. Immediately after the Russia-Ukraine war, NYMEX crude oil prices skyrocketed to a 14-year high, but substantially corrected later and fell back to more than a year’s low by the end of the year. Uncertain micro-economic conditions adversely hit the fundamentals of the commodity throughout the previous year.
The supply crunch due to a shortage of Russian oil and an increase in demand as pandemic-related travel restrictions eased resulted in rising pressure on prices in the first half of 2022. Meanwhile, global prices generally decreased in the last two quarters as refinery runs ramped up and global economic uncertainties reduced the demand for oil.
After Russia’s full-scale inversion on Ukraine, several western countries have announced a wide range of sanctions to limit their ability to pay for the war. The G7 proposed price cap and EU-led oil embargo were some such measures to cut Russia’s oil revenue.
But these measures created a steep energy crisis in Europe and had little impact on Russian exports. Moscow offered oil at discounted rates to top importing countries like China and India and maintained their oil revenue. Now India’s appetite for Russian oil increased significantly and makes up for 22% of India’s total crude imports ahead of Iraq and Saudi Arabia.
Global supplies have increased in the second half of 2022, supported by International Strategic Petroleum Reserve release programmes and increased output from the top producer US. Likewise, OPEC plus output also edged higher during the same period.
An increase in output and worries over demand alleviated tightness in the global oil markets. The aggressive rate hikes of central banks across the globe to curb inflation raised concerns over a recession and curtailed demand.
The broad-based inflation in several key economies has affected consumer budgets and petroleum consumption. High energy prices across regions contributed to persistent, broad-based inflation in several economies.Heightened fears of lower oil demand from the world’s largest oil importer, China, also weighed on global oil prices. China’s demand for energy commodities had contracted under the weight of its zero-tolerance approach to Covid–19. As lockdowns were persistent, energy demand collapsed in the country last year.
The US Energy Administration and OPEC forecast higher demand for oil in 2023. The agency predicts a moderate price hike in the first half of the year on expectations that Europe’s ban on Russian oil may be more disruptive to the global oil markets.
The potential economic upside coming from a relaxation of China’s zero Covid policy and the reopening of its borders are expected to attract more demand from China this year.
On top of reduced supplies from Russia, OPEC plus alliances pledge on a steep output cut amid worsening economic outlook would also provide upside potential to the commodity.
Meanwhile, major rallies are highly unlikely due to increased global economic uncertainties and growth risk in key economies. The IMF recently warned that a third of the global economy will be in recession this year and it would be tougher than in the previous year for many developed economies.
Looking ahead, a mild upside turnaround is expected in prices initially, but it may consolidate later. The US WTI prices are expected to trade in a range of $94-62 a barrel and breaking any of the sides would suggest fresh directions. In the domestic futures market, prices may hold the support of Rs 5,000 a barrel and turn higher but are unlikely to cross Rs 9,500 levels in the near future.
The author is Head of Commodities at