At the beginning of 2023, several factors are shaping the short- and medium-term dynamics of oil prices this year. Concerns over supply and demand, tighter monetary policy around the world, expectations of a significant economic slowdown and possible recession, and a resurgence in China are all affecting crude oil prices, OilPrice reported.
During the first week of the year, oil prices fell 9% in the first two trading days, the worst start to a year since 1991. The price of Brent crude fell below its level of a year ago for the first time in two years.
The annual change in the U.S. benchmark WTI crude has also turned negative several times in the past two months.
According to McGeever, the base effects, i.e. prices and inflation rates compared to the same period last year, are falling and could signal deflation in energy commodities, which could amplify the fall in broader inflation, bringing it closer to the Fed's 2% target.
Nevertheless, the Fed is not abandoning its hawkish stance and determination to fight inflation, which is "sustainable."
St. Louis Federal Reserve Bank President James Bullard said this week that the prospects for a soft landing for the U.S. economy have increased since the fall of 2022, thanks to a strong and resilient labor market.
Nonetheless, recession fears persist. The current weak demand for oil in both the U.S. and China reinforces the short-term bearish outlook for oil prices.
ING strategists said, the oil market looks more secure in the short term, and risks are likely to be shifted to the downside. However, our oil balance sheet is starting to show tightening in the market from Q2 through the end of the year, suggesting that we should see higher prices from Q2 2023.
According to broker PVM Oil, there is no doubt that the prevailing downtrend is a bear market.
Available Russian oil has also played a role in the continuous downward move, as has the coordinated SPR issue. The question now is whether these forces will be in play during 2023 and whether cheaper oil prices will be the main theme this year.
