This year's oil rebound is plausible

OPEC countries officials told Reuters that the price of oil might return to $100 per barrel in 2023 as Chinese demand rebounds following the repeal of COVID restrictions and supply growth is constrained by a lack of investment. A rising number of authorities foresee a likely return to $100 per barrel.

Across 2022, oil prices surpassed $100 for the first time since 2014, as demand rebounded from COVID-19 lockdowns in much of the world and Russia's invasion of Ukraine heightened supply concerns. However, Brent oil finished the year near $86 due to fears of a global recession.

A climb back above $100 for an extended period of time would increase revenue for OPEC countries, whose economies rely heavily on oil money, and be detrimental for industrialized nations attempting to manage inflation and interest rates.

In October, the Organization of Petroleum Exporting Countries and allies, including Russia, known as OPEC+, agreed to reduce production by 2 million barrels per day, or around 2% of global demand, in order to maintain the market.

After 2022's volatility, which brought Brent crude near to its all-time high of $147 just after the start of the Ukraine war, Brent has risen to just over $86 so far in 2023, aided by Russia's promise to reduce output in March.

OPEC and OPEC+ do not release oil price projections and have no pricing objective. Officials and ministers from OPEC and OPEC+ are frequently reluctant to discuss the direction of prices publicly.

In unusual public remarks on February 8, Iran's national representative to OPEC, Afshin Javan, stated that oil prices may rebound to about $100 in the second half of the year and that OPEC+ was likely to maintain its current output policy at its upcoming meeting.

Reuters discussed the idea of $100 oil with five more OPEC countries leaders in private. Three of them anticipated an increase in oil prices in 2023 rather than a fall, and two predicted a return to $100.

One of the OPEC insiders stated, "It should be said that the shadow of the energy crisis will continue to dominate the world and the general trend of global oil prices will increase."

"In my opinion, the return of Brent crude to above $100 at some time in 2023 is not unexpected."

The current industry consensus is that prices will decrease in 2022. According to a study by Reuters of 30 economists and analysts, Brent will average $89.37 per barrel in 2023, down from $99 per barrel in 2022. Goldman Sachs reduced its Brent prediction for 2023 to $92 dollars.

The abrupt relaxation of China's COVID limitations is projected to enhance oil demand growth in 2023, after the country posted a slight drop in 2022 for the first time in several years.

According to OPEC sources, a lack of investment to enhance supply is also supporting prices. OPEC countries are pumping over 1 million barrels per day (bpd) less than their target, according to the organization's own data and other estimates.

OPEC predicts that non-OPEC producers will continue to pump more in 2023, but the increase of 1.5 million bpd falls short of the anticipated demand growth of 2.2 million bpd.

"Even with the additional supplies coming from here and there, still the market will witness a lack of supply compared to the demand," a second OPEC source said. "There is more upward than downward pressure on the market."

The OPEC+ reduction agreed to in October is in effect into 2023. Fatih Birol, the head of the International Energy Agency, advised producers on February 5 to reassess their output strategies "if demand goes up very strongly."

They have no current plans to change direction. At a meeting on February 1, top OPEC+ ministers approved the present policy, following which a source stated that the primary message was that OPEC+ will maintain its current track until the end of the deal.

After Russia announced output cuts, two OPEC+ delegates told Reuters on Friday that OPEC+ has no plans to take action.

Another OPEC source concurred that prices may return to $100 per barrel in 2023, although economic growth expectations posed the greatest risk.

"Everything will depend on the economy – if there is improvement in China of course, we will maybe arrive back to 100," he stated.  A crude oil price between $85 and $100 is "good for everybody," he continued.

The International Energy Agency (IEA), which represents 31 countries including the world's largest consumer, the United States, did not immediately respond to a request for comment on what $100 oil might entail for its members on Friday. In November, Birol stated that $100 oil posed a significant threat to the world economy.

In addition to the likelihood of a recession, those OPEC sources who foresee lower prices in 2023 stated that it was uncertain how much demand would come from China and whether the country would again implement lockdowns to manage COVID outbreaks.

"There are still uncertainties about economic growth, inflation and China’s reopening," said the second OPEC source who anticipates lower oil prices this year.

By fLEXI tEAM