A few weeks ago, we flagged the growing downside risks to our oil price forecasts due to weak Chinese demand. Despite the loosening of China’s COVID restrictions since then, we think the end to the flagship zero-COVID policy will only come in April 2023 at the earliest, keeping oil demand subdued until at least then. Since we flagged those downside risks, there has also been a deterioration in investor sentiment towards oil and the Brent futures curve has flipped from backwardation to contango. Given that we expect a renewed downturn in the S&P 500 early next year, this downbeat sentiment could last for a while.
Taking all of this into account, we have decided to lower our price forecasts for 2023. We now forecast the Brent crude price to fall to around $70 per barrel in Q1 2023, before gradually rising as global economic growth starts to pick up, ending 2023 at around $85 per barrel. (See our forthcoming Update.)
Turning to next week, the release of US inflation data on Tuesday could shape up to be the main event, even upstaging the Federal Reserve interest rate decision on Wednesday. If we are right and inflation falls from 7.7% in October to a below-consensus 7.2% in November, then this could lead to an improvement in market sentiment and boost commodity prices. In this event, though, we don’t think investors should get too carried away, given that we think global economic growth has further to slow in Q1 2023.
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