Updated Oil Price forecast for 2023 - Jan 16

[dan_s]

On January 11th Morgan Stanley updated their oil price forecast for 2023. Here is the summary.

Macro-headwinds and the prospects of stock builds in 1Q
weigh on oil markets for now. However, in the background, the
'Seven Uncertainties' of our previous note are mostly turning
into tailwinds. After a weaker 1Q, we see the oil market
coming into balance in 2Q and turning tight again in 2H. < Unless we have a MAJOR RECESSION, my forecasts are now based on WTI flopping around $80/bbl in Q1 and then ramping up to $100/bbl within six months.

Short term – Macro headwinds and prospects for stock builds in 1Q: The second
half of 2022 saw GDP growth slow down, forward GDP expectations revised
downwards, PMIs roll over, monetary conditions tighten and activity levels in
China deteriorate. Oil demand weakened in response,allowing the market to
return to balance, from its prior deficit, and oil prices to fall. Not all those macro
headwinds have fully played out, we suspect. Our economists have above consensus
GDP forecasts by now, but further rates hikes lie ahead and key PMIs
have continued to trend down. Also, our oil market balances point at modest
stock builds in 1Q.For now, these factors weigh on oil prices.

Medium term – 'Seven Uncertainties' mostly turning into tailwinds: In our late
November note, we discussed a number of key uncertainties for oil markets for
full-year 2023. This included China's re-opening, further recovery in aviation,
downside risks to Russian supply, the slowdown in US shale and the end to SPR
releases. From the perspective of oil prices, news flow on these factors has
mostly been positive since then. Even with modest demand growth assumptions,
we see the oil market coming into balance in 2Q and turning tight in 3Q and 4Q,
supporting higher prices later this year.

Longterm – Under-investment remains a concern: In this note we also review
activity levels in 2022. Exploration capex showed another real-terms decline,
exploration wells drilled reached a 10+ year low and discoveries were once again
close to historical lows. Spending on field development rebounded, but much of
this was to absorb cost inflation, which accelerated strongly. New projects
sanctioned contained ~12.7 bn bbl of oil resources, the second-lowest level in 20
years. On average, those sanctioned projects yield an estimated 28% post-tax IRR
at $60/bbl long-term, up from ~20% based on projects sanctioned in 2021 – oil
& gas projects need to clear an increasingly high bar for operators to move them
forward.

Putting it all together – Range-bound for now, but price recovery ahead as the
year unfolds: We expect Brent prices to remain range-bound for the remainder of
1Q around the current level of ~$80-85/bbl. However, inventories are low and
spare capacity is thin. When demand growth returns, the oil market will likely
find that the supply ceiling is still not far away. Our expectation is that this will
support Brent in the $100-110/bbl range by 2H.

Send me an email if you'd like to read the full report: dmsteffens@comcast.net