Oil prices surged massively so far this year on tight supplies. The price of Brent Crude surged around 50 percent in the first half of 2022, its best performance since the first half of 2009 as the geopolitical crisis between Russia and Ukraine disrupted the oil space. Meanwhile, WTI Crude advanced over 40 percent in this period.
Recently, the OPEC+ — the Organization of the Petroleum Exporting Countries and its allies confirmed a proposal to boost output by another 648,000 barrels a day in August. However, experts believe that this will still be insufficient to balance the market.
However, as to the crude oil prices will increase or fall going further experts remain divided.
According to Citigroup, crude oil prices could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits. However, JPMorgan warned that oil prices could surge 240 percent to $380 a barrel if Russia slashes production in response to a price cap.
Let's look at the rationale behind the wide discrepancy in the outlook of crude oil prices by the two investment firms.
Citi's outlook is based on an absence of any intervention by OPEC+ producers and a decline in oil investments. A Reuters report quoting Citi said that it looks like in 2022 and 2023, Russian crude exports may remain robust even if refined product exports may fall. That said, further global crude oil demand weakness should spell higher inventories, which could weaken crude prices going ahead, Citi added.
Citi expects Brent crude prices at $99 per barrel in the third quarter of 2022 and at $85 a barrel in the fourth quarter of the year. Overall, it sees Brent crude price to average at $98 a barrel in 2022 and $75 in 2023. Meanwhile, for WTI Crude, Citi estimates it price to remain at an average of $95 per barrel in 2022 and $72 per barrel in 2023. For the third quarter, it forecasts WTI crude to average $94 per barrel, meanwhile, WTI price will fall to $81 per barrel in the fourth quarter, Citi added.
“For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions,” Citi said, adding that but oil prices fall in all recessions to roughly the marginal cost.
Meanwhile, JPMorgan believes that if Russia dramatically slashes production in response to Western plans to cap the country's energy prices, crude oil prices could surge 240 percent.
G7 leaders, recently have announced they were working on plans to cap the price of Russian oil in an effort to keep up the pressure on Moscow over its invasion of Ukraine.
However, JPMorgan said that Russia, which is one of the world's key energy exporters, is in a relatively strong position thanks to the recent increase in oil and natural gas prices.
"Moscow could retaliate against the G7 price cap and slash its oil production by as much as 5 million barrels per day without causing excessive damage to its economy. But such a cut would be disastrous for global oil markets, given the supply and demand mismatch that has already sent the Brent crude price up almost 50 percent this year to around $112 a barrel," JPMorgan said in its note.
It added that the most extreme scenario of a 5 million barrel per day slash in production could drive oil prices to a stratospheric $380 per barrel.
"Russia's policymakers will likely address the challenge of the oil price cap from the position of strength. It had already showed its willingness to withhold supplies of natural gas to EU countries that refused to meet payment demands," the report pointed out.
However, most analysts back home, forecast crude oil prices to remain at an average of $100-150 per barrel for 2022. Brokerage house Motilal Oswal Financial Services said that the global oil market remains in a structural deficit and would need much higher prices to regain its balance, as Chinese demand is already recovering and on the other hand, Russian oil production could fall by another 0.5Mbpd.
“Unless the war in Ukraine spills over to the rest of Europe, the next recession looks more likely to resemble that of 1990-1991 than of 2007-2008. If that’s the case, oil demand may be weakened from the downturn, but it should still see annual growth. Oil prices would drop, but they likely won’t collapse. The resulting supply and demand imbalance is fertile ground for a sustained period of higher prices to WTI $145,” it noted.
Meanwhile, Goldman Sachs predicts brent may average $135 per barrel in the next 12 months.
“The structural shortage of crude oil remains unresolved even though the oil market touched its first surplus since June 2020 in April-May of 2022. This politically created surplus is already ending, however, driven by the ongoing recovery in Chinese demand, with an 0.5 mb/d expected further decline in Russian production following the European ban,” it noted.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.