Oil Prices to Remain Rangebound in Coming Quarters but Likely to Reaccelerate in 2023

We maintain our prior [Apr-22] oil price forecast at $106.2/bbl for 2022, with Q3-22 and Q4-22 expected to actualise at $110/bbl and $105/bbl respectively. Despite risks to Russian supply and the well-established lack of supply-side elasticity, the oil market will struggle to rally much beyond previous sustained highs at $120/bbl amid broader recessionary risks. We have adjusted our forecast into 2023 to account for the limited prospect for structural replacement barrels in the context of Russian oil supply losses. Brent is expected to average $ 100/bbl in 2023 , up from our previous forecast at $90/bbl. In the near-term, we expect heightened recessionary risk to dominate oil price formation. Most directly, a deteriorating macro environment will deter speculative paper market participants from building significant length. Indirectly, worsening economic conditions will force policymakers into less stringent enforcement of the sanctions regime targeting Russian oil exports to third countries, to avoid stoking inflationary pressures further . However, with limited replacement barrels available for the 1.3mn b/d of oil we expect to be displaced from the global oil market from Dec-22 due to the EU’s embargo on Russian crude, our modelling suggests the oil market will experience another period of tightness during Q3-23. Assuming economic weakness is cyclical and the combined loss of Russian barrels and the lack of replacement barrels is structural (or at least cyclical with a longer tenor), oil prices are likely to reaccelerate in 2023.