“From $70 to $94 per Barrel: Oil’s Rollercoaster Year Driven by Supply Worries, Despite Economic Growth Concerns

Crude oil prices surged to new highs, hitting a 10-month peak on September 15. This marked the third consecutive week of gains, with prices climbing by as much as 3 percent in just this week. The upward trend resulted in a substantial 15 percent increase in oil prices for the month of August and a significant 13 percent rise year-to-date.

This surge was driven by several factors. Firstly, China reduced banks’ cash reserve requirements by 25 basis points to stimulate its economic recovery and potentially boost oil demand. Additionally, strong buying activity from hedge funds over the past two weeks, driven by tight supply, contributed to the rally. Earlier in the week, both the International Energy Agency and the Organization of Petroleum Exporting Countries warned that the market would experience a deficit until the end of the year. The anticipation of a tighter supply outweighed concerns about weaker economic growth.

In terms of price movement, crude oil began the year at $82 per barrel (bbl), dropped to $70 per bbl in June, and currently stands at a robust $94 per bbl. The rapid price increase from $82 per bbl on August 23 to the current $94 per bbl illustrates the suddenness of the surge.

Mark Matthews, head of research for Asia at Julius Baer, attributed the jump in crude oil prices to a sudden supply cut by Saudi Arabia. However, he believes this may not be sustainable, and prices are likely to fall back to $75 per bbl by 2024 as Saudi Arabia may resume supplies due to competition from other nations.

As we enter Q3FY24, there are concerns about deficit estimates. OPEC predicts a deficit of 3.3 million barrels per day (mbpd), while the IEA estimates a more moderate 1.1 mbpd deficit, and the EIA sees a deficit of 230,000 barrels per day. The impact of international crude oil prices on India is significant, as the country relies on imports to meet over 85 percent of its crude oil requirements. In response to rising oil prices, the Indian government reintroduced a windfall tax on domestic crude oil production in July, after a two-month hiatus.

Another critical factor is global oil demand in 2023. The EIA forecasts a demand increase of 1.8 mbpd, the IEA projects a 2.2 mbpd rise, and OPEC anticipates a 2.4 mbpd increase.

Investors and analysts are closely monitoring the trajectory of Brent prices and the outlook for crude in 2023. Predictions vary, with Saxo Bank forecasting a price of $94 per bbl, Probis Securities going even higher at $100 per bbl, Goldman Sachs offering a target of $105 per bbl, while Fat Profits expects prices to range between $90 and $95 per bbl. Bank of America takes a more conservative stance, averaging at $90 per bbl, and Wood Mackenzie forecasts a rate of $88 per bbl for crude.