Wall Street is bullish on oil. So why are prices falling?
Many oil traders and analysts believe prices over the coming months will far exceed those at which crude can be bought in the futures market now. But prices recently touched their lowest levels of the year, showing how uncertainty, volatility and risk can pry gaps between perceived values and market prices.
Brent crude futures for the next year currently range in price from $81.11 a barrel for December 2023 delivery to $84.25 for delivery in February 2023. Meanwhile, analysts at Bank of America, Goldman Sachs, J.P. Morgan, Morgan Stanley, UBS and the consulting firm Energy Aspects are forecasting, on average, a Brent price of $105.50 next year, implying that an investor buying, say, August futures at $82.71 a barrel could earn a return of more than 27% in just seven months.
But there are lots of risks involved. Analysts’ forecasts vary widely, mostly because of an especially cloudy outlook for next year’s oil supply and demand. Some analysts are refraining from making price projections for next year until after the Organization of the Petroleum Exporting Countries’ next meeting on Dec. 4. Oil prices also have been exceptionally volatile since Russia’s invasion of Ukraine and its potential impact on Russian oil supplies—and with rising interest rates and China’s continuing fight with Covid threatening economic growth.
Wall Street struggles with forecasting everything from stock prices to bond yields even under the best of circumstances. Witness oil’s 2014 crash, its early pandemic slide into negative territory or its current 35% decline from March’s peaks, none of which analysts anticipated.
But the current situation is even more unpredictable than usual. Highlighting the uncertainty: The oil options market currently signals a 46% probability that Brent oil delivered in August 2023 will settle more than $20 higher or lower than its current price.
“There are so many geopolitical issues around oil that the head spins at times,” said Hari Hariharan, chief investment officer of NWI Management, a global macro hedge fund.
Worries about a recession have sent prices tumbling since June, when Brent at one point fetched over $123 a barrel. They have taken their latest steep step down over the past few weeks, as renewed lockdowns risk delaying China’s reopening, while rumors of a relatively permissive price cap on Russian oil has lifted expectations for the country’s exports in the new year.
The potential impact of the Ukraine invasion on Russian oil supplies has increased the volatility of crude prices.
Yet analysts remain bullish for a host of reasons. Global oil stocks are at depleted levels. Coming European Union embargoes on Russian crude oil and refined products could still affect production. The Biden administration’s releases from the Strategic Petroleum Reserve are tapering off. And most anticipate above-trend growth in global demand driven by China, India and other emerging markets conquering Covid and reopening their economies.
Russian supply and Chinese demand are the two biggest question marks driving the differences between forecasts.
“The pent-up demand out of China is going to be enormous,” said Amrita Sen, director of research for Energy Aspects. Ms. Sen said, “That could swing demand by at least a million barrels a day, and that could easily make the difference between an oil price forecast of $95 to $105 versus $120 to $130. Easily.”
J.P. Morgan analysts lowered their forecast for Brent in 2023 this week by $8 a barrel to $90, after concluding that Russian production will fully normalize to prewar levels despite the coming embargoes. Meanwhile, Energy Aspects analysts are holding fast to their $123 forecast, in part because they see Russian production taking a million-barrel-a-day hit by March of next year.