Oil price forecast for 2023: more volatility ahead?

Leeann Nash November 28th 2022 - 3 minute read

The oil markets have had a tumultuous year. After rising steadily amid a post-lockdown resurgence in demand, crude then spiked to a near record high following Russia’s invasion of Ukraine. Since then, it has edged lower as storm clouds gather over the global economy.

But what does next year hold? We take a look back at the key events that have moved oil prices this year before turning to see what could affect crude in 2023.

What impacted oil prices through 2022?

Russia’s invasion of Ukraine

Undoubtedly one of the single biggest events that affected crude prices this year was Russia’s invasion of Ukraine, and the ensuing economic warfare.

What was intended as a swift strike to enact regime change in Ukraine ended up as a gruelling months-long war. Markets worried that Russia – the world’s third-largest oil producer – would struggle to produce and sell oil as its war machine sapped resources and sanctions constrained the country’s ability to export.

In particular, the US, UK and EU announced oil embargoes. Meanwhile, the EU and the Group of Seven nations (G7) eventually announced plans to put a price cap on seaborne Russian oil.

Brent crude surged to hit $139.13 a barrel in March, not far off the all-time high of $147.50 hit in July 2008.

Demand booms before ebbing away

Oil had been steadily climbing in the run-up to Russia’s invasion. As more economies emerged from lockdown, they showed a voracious thirst for crude. Supply grew tight, as producers had slashed output amid the pandemic-era price slump.

However, demand seemed to have peaked in June. Surging inflation and rising interest rates began to squeeze the global economy, along with lockdowns in China as it pursued its strict zero-Covid policy.

Against this backdrop, markets became fearful of a worldwide economic downturn in 2023, which would once again sap oil demand. From June to November, brent crude fell from around $125 to $90 per barrel.


All the while, the OPEC+ oil cartel and the Biden administration were engaged in a tug-of-war of sorts over oil prices.

President Biden announced the largest-ever drawdown of US emergency stockpiles, releasing 180 million barrels of oil over sixth months, draining around a third of the country’s Strategic Petroleum Reserve (SPR).

Biden also courted Saudi Arabia – the de facto leader of OPEC – in an attempt to convince the oil cartel to cut output, thereby bringing prices down.

However, after a modest rise in production targets, OPEC+ eventually slashed output by 2 million barrels per day, snubbing Biden’s diplomatic attempts. The White House signalled that it may authorise further releases of strategic reserves.

David Goldwyn, who served as a senior energy official in the Obama administration, commented: ‘I think we are in a new era of much more nimble and deft use of the SPR as both a market and a geopolitical tool.’

What could impact oil markets in 2023?

Many of the factors that affected the oil markets in 2022 will likely carry over into 2023. And while some may hope that prices stabilise, we could be in for further spikes.

Russia-Ukraine war

Despite suffering humiliating defeats, hastily retreating from annexed territories, Russia seems determined to continue its invasion of Ukraine. As a result, prices could remain elevated above pre-pandemic levels.

Following Biden’s SPR drawdowns, US oil stockpiles are at multi-decade lows. OPEC+ still favours high prices, while many member countries are struggling to meet production targets. And Iran and Venezuela – two oil-rich countries – both remain under sanctions.

This is the backdrop to heightened volatility as Russia and the West continue to wage economic warfare.

The impacts of the oil price cap from the EU and G7 are hard to predict. Proponents hope the cap will drain Russian oil profits while keeping prices low.

However, Russia has demonstrated its willingness to endure damage in order to inflict pain on its enemies. The Kremlin has threatened to completely cut off oil supplies to any countries that abide by the cap, which could see oil prices skyrocket.

Analysts at JPMorgan warn that, in a worst-case scenario, Russia could slash production by 5 million barrels a day, pushing Brent crude up to $380 per barrel – more than two and a half times its previous record high.

Dwindling demand?

However, there are downside risks to the price of oil. Chief among them is the threat of a global recession, which could hammer demand.

The UK economy already appears to be in a recession, with the Eurozone hot on its heels. Meanwhile, across the Atlantic, there are signs that aggressive interest rate rises from the Federal Reserve are beginning to slow the world’s largest economy.

China – the world’s second-largest economy – is also in trouble, as the country’s property crisis and zero-Covid policy threaten growth.

If the world falls into a recession, oil demand could decline, weighing on crude prices.

Whether this will lead to a fall in oil prices may depend largely on supply. If anti-Russia sanctions and social unrest in oil-producing countries keep supplies under pressure, crude could remain elevated despite a global downturn.

One potential impact of a recession is that it ‘resets’ the oil market, causing prices to stabilise after this year’s extreme volatility.

However, with Russia’s invasion of Ukraine grinding on, this may be wishful thinking.

Written by
Leeann Nash

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