- On a yearly basis, oil prices increased 43 percent in 2022 from 2021
- The oil industry’s ability to predict crude prices has been poor
- Volatile geopolitical and economic factors blur the outlook for 2023
Although oil markets are no strangers to volatility, oil prices exhibited notable swings in 2022. Russia’s invasion of Ukraine on February 24 created significant uncertainty, and prices spiked accordingly. On March 8, Brent, the industry’s main global benchmark, exceeded $133 per barrel – jumping more than $50 compared to the beginning of the year and reaching a level last seen in June 2008, just ahead of the global financial meltdown, reports GIS.
Looking through frosted glass
No one knew the geopolitical consequences, and many feared a substantial loss of Russian oil supplies. For example, the International Energy Agency (IEA), predicted that “from April, 3 million barrels per day of Russian oil output could be shut in” – about a third of Russia’s total production and almost 3 percent of the global output. The agency warned that this could produce “the biggest supply crisis in decades.”
However, those fears gradually dissipated. Russian oil exports proved more resilient, thanks to the basic functioning of a liquid, global market, which allowed a redirection of trade flow with more Russian crude diverted from Europe to Asia, and more Middle Eastern and other non-Russian oil sent to Europe. Prices eased accordingly and ended the year around the same levels they started. Still, on a yearly basis, they were 43 percent higher compared to 2021.
Many wonder whether the upward march will accelerate in 2023, as largely predicted by the bulls of Wall Street. Although most published oil price forecasts for this year have been revised downward compared to previous estimates, they currently fall within the $90 to $100 per barrel range.
However, the industry’s track record of predicting oil prices is poor, and any assumption is likely to prove wrong. That is even more so today, given the high level of uncertainty surrounding fundamental dynamics that directly influence oil markets but are acting in opposite directions – with geopolitics and economic warfare, China and the global economic outlook being the most unpredictable factors for this year and beyond.
Putting a squeeze on a giant
Russia’s role in global oil markets cannot be underestimated. It is the world’s third-largest producer after the United States and Saudi Arabia and the second-largest exporter after Saudi Arabia. It is also a key member of the OPEC+ group, where it stands as the second-largest producer after the Saudi kingdom, with production more than twice the level of OPEC’s second-largest producer, Iraq.
Russia is also the world’s most sanctioned country. In less than a year, the European Union alone adopted nine sanctions packages, targeting various sectors, businesses and individuals in the country. Of most relevance are the sanctions imposed on Russian oil. In its sixth package announced in June 2022, the EU announced it would ban imports from Russia of crude oil and refined petroleum products, effective from December 2022 and February 2023, respectively. A temporary exemption was given for imports of crude oil by pipeline into those EU member states that, due to their geographic situation, have no viable alternatives.