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Fitch: Average price of oil to be USD 85 this year

13 April 2023 15:35 (UTC +04:00)

OPEC+ members’ decision wto cut production by almost 1.2 million barrels per day (MMbpd) from May until end-2023 should support prices in the short term, Fitch Ratings says, increasing chances that the market could switch into deficit in 2H23, particularly due to recovering consumption in China, APA-Economics reports citing Fitch Ratings international rating agency.

The decision surprised the market with Brent subsequently reaching about USD85/bbl on 3 April. Brent was trading below USD80/bbl in the second half of March despite sanctions related to Russian oil exports, compounded by concerns over the banking crisis fallout. The sanctions have not removed any significant volumes from the market, as Russian oil and oil products were mostly redirected from Europe to other regions, notably Asia. This contrasts with Brent averaging about USD100/bbl in 2022, when the price was supported by concerns over an upcoming reduction of supplies from Russia.

Additionally, Russia has recently signalled that it will reduce its production by 0.5MMbpd, which was initially perceived as being due to its inability to re-allocate all oil and oil product volumes because of sanctions.

We believe that the market was in a moderate surplus in 1Q23 with OECD commercial inventories increasing by 32 million tonnes in January and a further 10 million tonnes in February. The decision on production cuts increases the likelihood of the market switching into deficit this year as demand will increase by 2MMbpd in 2023, according to the US EIA’s estimates, mostly because of China reopening, which will account for about half of demand growth.

Greater demand will be only partially offset by higher production in North and South America, which could add a total of 1.7MMbpd, according to the IEA. While Russia may struggle to increase production because of the sanctions, Saudi Arabia, the UAE and Kuwait can fairly quickly adjust their supplies. In 1Q23, spare capacity in the Middle East was estimated at 3.25MMbpd, according to the US EIA, which will increase to almost 4.5MMbpd following the recently announced cuts.

Fitch assumes Brent prices to average USD85/bbl in 2023, reducing thereafter. The latest decision does not have any immediate impact on our price assumptions. However, we believe there is now a greater upside to our oil short-term price assumption.