Brent Crude prices closed on Wednesday 7th December at $77.17 per barrel, the lowest the benchmark for oil has reached in 2022. Having started the year just short of the $80 mark, crude prices escalated throughout Q1 before leaping above $100 per barrel in early March following Russia’s invasion of Ukraine and remaining high until late June. Since the summer, prices have predominantly been on a downward trend which has accelerated in early December.
Brent Crude prices over past 12 months (Source: Trading Economics)
Why have oil prices been falling recently?
There have been several key reasons for oil prices dropping in recent weeks. Firstly, widespread expectations of a recession in the US, UK and Europe in 2023 have weighed on prices. The risk of recession has also led to a strengthening of the US Dollar in the past week, after a period of decline in November, which has also contributed to lower oil prices. As investors tend to view the Dollar as a safe haven for currency during difficult economic times, the currency strengthens and makes buying oil more expensive for other nations, therefore weakening demand.
Other key factors in decreasing demand for oil in recent months include China’s Zero-Covid policy and a mild Autumn and early Winter in Europe. On the former, as the world’s largest importer of crude oil, China’s suppression of economic activity through its use of strict restrictions and lockdowns to manage the spread of Covid has undermined prices for oil. In Europe, relatively warm weather from September to November meant fewer people were heating their homes and therefore decreased demand for distillates, such as heating oil.
However, the decline in oil prices hasn’t all been demand-led. While there was a short rebound in prices in October following OPEC’s announcement of cutting production by 2 million barrels per day, the group confirmed in their November meeting that there would not be further cuts at this point. Furthermore, given that OPEC members regularly fall short of their production targets anyway, the October announcement has not caused a significant dent in global oil supply. Meanwhile, Chevron has agreed a Biden-backed deal with the Venezuelan government to begin a project to revive and improve the country’s crude oil production facilities. In the short term, this joint-venture could add as much as 200,000 barrels of supply to the global oil market, further easing supply fears.
Another key issue that has dominated the supply-side risks in the oil market is price cap due imposed on Russia by G7 nations. Before the official announcement of the details of the price cap, there was uncertainty around how it might impact the oil market. The lack of clarity about the price level of the cap, but also on issues such as how it would impact shipping and insurance companies, has now been relieved following the confirmation of the $60 cap on December 2nd. While there may yet be retaliatory measures from Russia to ensure their oil profits when selling to China and India, the two major nations who refused to agree to the cap, the official announcement has brought temporary stability to oil supply in place of previous uncertainty.
ChAI’s Brent Crude price forecast, 12/10/22
What is the oil price forecast for 2023?
As shown in the graph above, ChAI’s forecast for Brent Crude prices from the second week of October predicted the subsequent downtrend from $92.45 to $77.17 within the 70% confidence bounds. While it is likely that there will continue to be significant price volatility in the oil market in the near future, ChAI’s models can offer insights into several key drivers for prices in the near term.
The image below shows the datasets influencing ChAI’s current 1 and 3 month forecasts for Brent Crude, and it is instantly noticeable that Position and Trend information are aggressively bearish on these horizons. Regarding Position data that ChAI has picked up recently, as noted in a recent article by Reuters, hedge funds’ net long position in Brent crude contracts is close to its lowest level in the past decade. This represents both a building of short positions and also a wider exodus from the market by hedge funds, many of which retreated from oil this year due to the challenge of trading during a period of unprecedented levels of volatility. Meanwhile, ChAI’s Trend models are anticipating that the recent downward momentum in the oil market will continue in the short term.
ChAI’s Brent Crude Influence Chart, 08/12/22
