Oil prices are holding firm this morning, seemingly consolidating last week’s rally which saw both benchmarks trading at a one month high.
Brent Crude is up 0.41 per cent at $86.26 per barrel, while WTI Crude has climbed 0.5 per cent and is trading at $80.66 per barrel, clinging on to gains made over December.
Prices had risen steadily in recent weeks amid increased demand from colder weather and Kremlin threats of further cuts in crude output following the imposition of a G7 price cap on Russian exports.
The European Union and G7 nations finally settled on sanctions and a price cap of $60 per barrel last month.
In response, President Vladimir Putin has banned the supply of crude and oil products from February 1 for five months to nations that commit to the cap.
Meanwhile, Deputy Prime Minister Alexander Novak announced to Russian media that the country could cut oil output five to seven per cent in the first quarter of this year.
The UK, US and EU have already announced multiple restrictions on oil purchases as part of multiple waves of sanctions following Russia’s invasion of Ukraine last February.
This includes a European phase out of seaborne oil shipments, with the continent looking to the Middle East and US alongside mainstay supplier Norway to meet its needs.
This follows a sustained Russian squeeze on supplies into Europe, with the continent racing to fill up storage over winter – which has slid to 84 per cent of capacity following increased usage over the festive period.
Russia is likely to target further trading with China and India to make up for the shortfall, with both countries gobbling up supplies left on the market to meet consumption needs.
Economic slump to weigh down oil prices
Oil prices remain well below the historic levels recorded in last year’s rally when prices peaked at a 14-year high of $139 per barrel in March.
Both benchmarks were still trading north of $120 per barrel into the summer.
There are also key headwinds for both benchmarks – with economic activity in China yet to recover from the pandemic.
China has eased its brutal pandemic restrictions in recent days, with President Xi seemingly U-turning from the country’s aggressive zero-Covid policy.
Nevertheless, the world’s largest crude importer and second-largest oil consumer has reported weaker factory data than analysts expected.
The Caixin/Markit manufacturing purchasing managers’ index fell to 49.0 in December from 49.4 in November.
The index has now stayed below the 50-point mark that separates growth from contraction for five straight months.
There is hope this will boost oil demand over the coming days and weeks.
However, news of a sharp increase in the first batch of oil product export quotas for 2023 implies that the Government is pricing in below-average domestic demand.
There are also expectations of slowing global growth, which could also weigh down oil prices this year.
IMF Managing Director Kristalina Georgieva has forecast that US, Europe and China are all slowing simultaneously, with expectations of a global recession and a tough 2023 ahead.
A survey of 30 economists and analysts from Reuters has calculated Brent crude will average $89.37 a barrel in 2023.
This is around 4.6 per cent lower than the $93.65 consensus in a November survey, reflecting increasingly gloomy sentiment.
The global benchmark has averaged $99 per barrel in 2022.