Brent: Price Expectations Softening, As Crude Struggles To Make Gains (2024)

This month we have made a downward revision to our Brent crude price forecast. We now expect Brent to average USD90/bbl in 2023, falling to USD83/bbl in 2024, down from USD95/bbl and USD88/bbl, previously. The price performance in the YTD has been weaker than expected and, despite several bullish developments in the market, Brent has failed to break back into the 90s. That said, a healthy support line has been forming around USD80/bbl, which should help stave off any significant moves to the downside.

Fitch Solutions And Bloomberg Consensus* Brent Forecasts, USD/Bbl

Spot202220232024202520262027
Fitch Solutions85999083838080
Bloomberg Consensus--8889847773

*Fitch Solutions is a contributor to the Bloomberg Consensus. Last updated March 6 2023. Source: Bloomberg, Fitch Solutions

Moreover, the fundamentals appear broadly balanced. The macroeconomic outlook remains challenging, but growth expectations seem to have bottomed out and, in some markets, have begun to rise. OPEC supply remains constrained, but there are considerable uncertainties around the outlook on Russia, while we expect significant gains in non-OPEC supply. Overall, we hold a neutral-to-bullish outlook for 2023, skewing to bearish next year.

Brent Struggling For Direction

Global - Brent Crude Monthly Prices & Annual Average Price Forecast, USD/bbl

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (1)

f = Fitch Solutions forecast. Source: Fitch Solutions

Bullish Positioning Failing To Spur Price Gains

Speculative positioning grew increasingly bullish over January and February, with the ratio of long to short managed money positions in Brent rising from 2.8 at the start of the year, to a peak of 10.0 in mid-February. Open interest, while remaining low in historical terms, has also risen considerably. All else equal, this should have translated into stronger price gains. However, market participants seem to have lacked conviction to move decisively either to the downside or the up.

Bulls Coming Back To The Market, But Brent Refusing To Budge

Global - Brent Crude Open Interest & Prices, USD/bbl (LHC) And Ratio Of Long To Short Managed Money Positions

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (2)

There have also been signs of improvement in the fundamentals. Physically-settled contracts continue to trade a discount to Brent futures, but the gap has narrowed, falling from an average of USD1.4/bbl in January to USD0.8/bbl in February. Meanwhile the futures term structure has also firmed, with the first to second month spread moving back from contango into backwardation, while backwardation in the first to sixth month spread has deepened, from a January average of USD1.2/bbl, to an average of USD2.1/bbl last month, both signalling expectations of a tighter market.

Markets Showing Signs Of Gradual Improvement

Global - Dated Brent To Frontline Futures Swap (LHC) And First-To-Second Month Brent Spread, USD/bbl

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (3)

Source: Bloomberg, Fitch Solutions

2023 Growth Expectations Rising, But Risks Abound

The macroeconomic outlook – which is key both to physical energy demand and sentiment towards oil – has somewhat improved since our last oil price piece. Our economists now forecast global real GDP growth of 2.1% y-o-y for 2023, up from 1.8% previously. The revision is largely due to the US, for which we recently upgraded growth from 0.3% to 1.0% and the eurozone (up from -0.3% to 0.3%), due to stronger Q422 momentum and a robust consumer story in the former and a sharp decline in energy prices in the latter. The balance of risk to the global economy is now, in our view, squared to the upside. Chinese economic growth could easily outpace expectations, with the recent upsurge in infection rates rapidly subsiding, spilling over into a healthier outlook on other emerging markets, particularly in Asia. There is also a growing probability that both the US and eurozone will avoid technical recessions this year.

Growth Expectations Bottoming Out, Picking Up

Global - Evolution of 2023 Global Real GDP Growth Forecasts (LHC) And FS Forecasts For Major Markets, %

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (4)

f = Fitch Solutions forecast. Source: Bloomberg, Fitch Solutions

That said, if combined with continued tight labour markets and stickier-than-expected inflation, this could force central banks into more rate hiking over the course of the year. This would both raise risks to economic growth in 2024 and provide stronger support to the US dollar. Our current view is for broadly sideways to downwards trading over 2023 for the USD. However, the dollar is now no longer as expensive or overbought as it was in H222 and a more hawkish stance by the US Federal Reserve could see us revise our expectations higher should inflation remain persistent. This, in turn, would put pressure on EM FX, rendering Brent more expensive in local currency terms.

Stronger Dollar Poses Risks For Oil

Global - US Dollar Index & Brent Crude Oil Price, USD/bbl

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (5)

Source: Bloomberg, Fitch Solutions

While healthier global real GDP growth should be bullish for Brent, these risks to the downside provide some mitigation. Moreover, the failure for oil price conditions to meaningfully improve despite the unexpected economic resilience and shift in oil market sentiment seen over the early parts of the year suggests that a stronger trigger would be needed, for a decisive break to the upside. This made our previous price forecast – which implied a rest-of -ear average broadly on par with the averages seen over 2022, in the wake of the invasion of Ukraine – hard to justify, given our mixed outlook on the market fundamentals.

Oil Demand Growth Softening, With EMs Carrying The Can

The demand side is somewhat bearish, albeit with pockets of expected strength. In 2023, we forecast global oil demand growth to fall to 1.5%, down from 2.4% in 2022. With a few exceptions, global mobility has recovered to its pre-pandemic norms and, excluding China, the increase in consumption this year will hinge on more organic increases in population movement and industrial activity. Given that we now forecast economic growth to fall to 2.1% in 2023, down from 3.1% last year, we can expect to see energy consumption growth softening in tandem. That said, the oil demand outlook is highly varied across different regions. Asia is the clear outperformer and we also forecast relative strength in Africa, the Middle East and Central & Eastern Europe, while Western Europe and the Americas are forecast to lag.

Weaker Economic Growth Crimping Energy Consumption

Global - Annual Average Change In Refined Fuels Consumption, '000b/d & Global Real GDP Growth, %

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (6)

f = Fitch Solutions forecast. Source: Fitch Solutions

The strength seen in developed market demand growth over 2021-22 was highly anomalous and entirely a result of the post-pandemic recovery and favourable base effects. Now that oil demand has normalised, structural drivers are once again taking hold, with the combination of falling energy-intensity of GDP, rising energy efficiency and an accelerated switch to low-carbon alternatives pushing growth into long-run decline. In fact, excluding the US, developed market demand looks set to peak this year. As such, emerging markets are back in the driving seat, accounting for over 90% of total global growth, according to our numbers. China – and the shift in Beijing’s Covid-19 strategy – is an important part of that, but growth looks relatively well-diversified across the EM basket as a whole.

DM Demand Approaching Its Peak

Global - Annual Average Change In Refined Fuels Consumption, '000b/d

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (7)

f = Fitch Solutions forecast. Source: Fitch Solutions

Fuel markets remain tight, although the expected deceleration in demand growth should help to alleviate this. The Brent 3-2-1 crack spread currently stands at around USD28/bbl, rough double the five-year historical average for this time of year. That said, it has now fallen by more than 45% from its USD52/bbl peak in June 2022. The margin pressures will likely remain most acute for middle distillates. On February 5, the EU imposed a ban on the import of Russian fuels. Given that the EU was previously Russia’s main fuel export market and Europe continued to import sizeable volumes after the start of the Ukraine war, we saw risk of substantial market distortions stemming from the ban. Early indications are of a significant drop in total fuel exports from Russia, although the market appears to be coping, as demonstrated by broadly sideways movement in the spread of gasoil to Brent in Europe. While increased refinery output and exports from China and India have boosted fuel supply softening margins in Asia.

Crack Spreads Strong, But Far Adrift Of Their Peaks

North West Europe - Brent Crude 3-2-1 Crack Spread, USD/bbl

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (8)

Source: Bloomberg, Fitch Solutions

Supply Growth Dropping Sharply, But Uncertainties Remain

While Russia’s crude exports have held up relatively well since the invasion, we expect to see greater physical disruption over 2023, as the combined impact of the EU’s fuel and crude import bans (the latter imposed in December 2022) and the G7 price cap take hold. Moscow itself has pledged a 500,000b/d cut in production from March and up to a 25% decrease in exports from its western ports. The market reaction to the news was muted. In part this may reflect the fact that declines had already been expected and were in effect priced in. However, we also take it as indication that, after a turbulent year, market participants have become increasingly desensitised to risks stemming from Russia. Russian risk premia were a key driver of the price gains seen in 2022 and the narrowing of these premia, which looks to be greater than we had previously anticipated, has informed the downward revision made to our Brent forecast this month. We would also note that the risks to our outlook on Russian oil production are skewed firmly to the upside, with 2023 growth currently set at steep 9.3% y-o-y contraction.

Meanwhile OPEC continues to evince a preference for prices over production, holding its current 2mn b/d cut in place. At around 800,000b/d, the effective cut was far lower, but nevertheless substantial, and the group has since indicated that it in intends to hold the cut in place until the next scheduled OPEC+ meeting in June and potentially far beyond. Continued strong compliance with the deal by the group’s cornerstone Middle Eastern producers, combined with ongoing involuntary production declines among its African members, should see the group’s output remain heavily constrained over the course of the year.

GCC Holding Firm To The Cut Deal

OPEC-10 - Oil Production Growth, 2023f, & Jan-23 Monthly Output Vs. OPEC+ Quota, '000b/d

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (9)

Fitch/Solutions

Iran, Libya and Venezuela – the three OPEC members not participating in the cut deal – pose some upside risk to prices. In Libya, political and security risks in the country remain extremely elevated, with the country torn between two competing governments. This leaves oil production and export infrastructure under threat of disruption, should the security environment deteriorate once again, as the two governments vie for power. Historically, Libya has seen dramatic swings in its output over short periods of time and so the downside risks to 2023 production are substantial, given that it is currently producing at around its 1.2mn b/d peak capacity. We forecast only marginal gains in Venezuelan output, while Iran accounts for most of the remaining growth. However, the latter’s outlook rests almost entirely on the nuclear deal with the US, which is struggling to progress. Already-strained relations between the two have been further damaged by Tehran’s response to a wave of domestic protests that began last September, as well as its growing military ties with Moscow. We currently assume that a deal will be signed by June, with production posting minor gains over H223, before ramping up more fully over 2023. However, risks to this view have risen considerably over recent months and our analysts now see a 45% probability of further delays to, or a breakdown of, nuclear negotiations.

Iranian Outlook Hanging In The Balance

Iran - Oil Production Outlook

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (10)

f = Fitch Solutions forecast. Source: OPEC, US Energy Information Administration, Fitch Solutions

On the whole then, OPEC+ should be a bullish factor for prices this year. However, this is being partly offset by a strong performance among non-OPEC+ producers. The bulk of growth can be attributed to the US, in which we forecast total crude, condensate and NGL output to rise by 910,000b/d this year. While this represents a healthy rate of growth, at 4.8% y-o-y, it is softer than the 5.5% we estimate for last year. Several factors inform this outlook. One is the substantial slowdown in capital spending, with capex among US independents set to rise by around 8% y-o-y in 2023, down from more than 35% in 2022. Cost inflation has also been weighing on growth, absorbing a large share of the increased spend. Monthly production has been holding up relatively well, according to data from the US Energy Information Administration, but the pressures are beginning to show, not least in the oil-directed rig count, which has fallen by over 3% in the YTD.

Rig Counts Falling, As Price Pressures Build

US - Shale Oil Production & Oil-Directed Rig Count, % chg. y-o-y

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (11)

Source: Baker Hughes, US Energy Information Administration, Fitch Solutions

Several other non-OPEC+ producers are also set for a healthy increase in supply, notably Norway (226,000b/d), Canada (136,000b/d), Guyana (114,000b/d), Brazil (110,000b/d) and Senegal (60,000b/d). In large part this growth will be drawn from long-cycle, greenfield projects and so will be relatively insensitive to fluctuations in price levels or shifts in supply elsewhere. That said, unplanned supply outages and potential project delays pose a perennial risk to growth.

Non- OPEC+ Driving Overall Production Growth

Global - Annual Average Change In Crude, Condensate & NGL Production, '000b/d

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (12)

f = Fitch Solutions forecast. Source: JODI, OPEC, US Energy Information Administration, Fitch Solutions

This commentary is published by BMI, a Fitch Solutions company, and is not a comment on Fitch Ratings Credit Ratings. Any comments or data included in the report are solely derived from BMI and independent sources. Fitch Ratings analysts do not share data or information with BMI. Copyright © 2023 Fitch Solutions Group Limited. All rights reserved. 30 North Colonnade, London E14 5GN, UK.

Brent: Price Expectations Softening, As Crude Struggles To Make Gains (2024)

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