At the start of 2023, many analysts were predicting that the global oil markets would tighten in the second half of the year, leading to a surge in prices.

According to analysis by the International Energy Agency (IEA), for example, the global demand for ‘black gold’ was set to rise by 1.9 million barrels a day (b/d) in 2023 to reach a record high of 101.7 million b/d. Meanwhile, with demand rising, the IEA suggested that the supply of oil was set to slow after growing by 4.7 million b/d in 2022.

With demand set to rise and supply expected to fall, predictions of oil reaching new highs in the second half of 2023 relied on China’s economic recovery as the country relaxed its Covid-19 restrictions, as well the recovery of industrial activity across the rest of the world – particularly in the US.

However, China has not bounced back as extensively as many predicted, while global growth is now set to fall from 3.5% in 2022 to 3% in 2023, which will hamper industrial activity levels.

So, are oil prices still expected to rise in the coming months, and if so, why?

What factors drive oil prices?

Like all commodities, oil prices are shaped by a complex interplay of factors. For instance, fluctuations in supply due to production levels or disruptions, as well as any decisions made by producers such as OPEC+, have a significant impact on the balance between oil availability and demand.

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As such, geopolitical events, particularly in major oil-producing regions such as the Middle East or Russia, can disrupt supply, increase production costs, elevating prices. Meanwhile, economic growth and industrial activity directly affect demand, and market and investors sentiment can amplify price swings as well.

Prospects for growth in oil prices in 2023

With these factors in mind, one of the biggest influences on oil prices in 2023 has been Saudi Arabia’s decision in June to cut the country’s oil output, which the country’s energy minister said would stabilise the market.

As a result of this decision, Saudi output was cut by 9 million b/d in July from more than 10 million b/d in June, in what was one of the biggest declines in production for a number of years. This production cut was extended on 3 August 2023, and comes in addition to a wider policy made by OPEC+ – of which Saudi Arabia is a part – to limit oil output in 2023.

Indeed, the Russian-led organisation of oil-producing countries and allies had already decided that output would decline by 3.66 million b/d in 2023, which translates to 3.6% of global demand. Therefore, supply was always going to start to lag behind demand, which could lead to a boost in prices.

Supporting this are figures from the IEA, which show that supply fell by 910,000 b/d to 100.9 million b/d in July, while the IEA indicated in its latest monthly market report that the demand for oil around the world is scaling towards record highs. In fact, a strong summer for air travel in combination with petrochemical activity in China (the largest importer of crude oil in the world) means that the demand for oil is going to hit 102.2 million b/d in 2023.

Consequently, this imbalance between demand and supply could boost prices towards the end of 2023, particularly if the global macroeconomic climate continues to improve.

Seasonal patterns and economic uncertainty could hold oil back

However, oil prices appear to be being pressured down in the short-term after hitting their highest level since 2011 in May 2022. As such, even though Crude WTI has recovered to $81.186 per barrel (as of mid-August 2023) from a sharp dip to $67.300 on 12 June, there are clearly factors that are holding oil prices back from reaching record highs at the moment.

On the supply side, for instance, American and non-OPEC+ oil production is gathering pace, so – even with cuts from Saudi Arabia and OPEC+ – global oil production is still set to rise by 1.5 million b/d to a record 101.5 million b/d in 2023, which could support prices from rising as significantly as predicted.

Elsewhere, should the global economy continue to sit in a cloud of uncertainty, demand levels may not pick up as much as analysts initially thought they would. This is corroborated by recent comments made by the secretary-general of the IEA, who said that significant price rises are being mitigated in the short-term by the fear of a looming recession.

Moreover, recent data from China shows that indicators such as retail sales, industrial output and investment are all posting growth figures that come under market expectations. As China is said to account for more than 70% of oil price growth for the rest of the year, the lethargic recovery of the Chinese economy could start to hamper oil demand and prices in the coming months.

Furthermore, such significant growth heading into the back end of 2023 would also conflict with the typical seasonal patterns of the oil markets. Between 11 July and 18 December, for example, Seasonax charts (which are available for HYCM clients) show that oil prices fall by 14.6% on average in the second half of a year. As such, record highs could be pressured down should the markets follow their usual patterns.

Opportunities for investors

The above paints a rather mixed picture for the outlook for oil prices for the rest of 2023, but either eventuality (i.e. growth or decline) should present investors with opportunities.

On the one hand, prices could rise significantly higher from their current level (circa $81 per barrel) to spike to $100-plus per barrel. To gain some clues as to whether this will be the case, investors should look to declines in inventory levels, which tend to signal that demand is starting to rise.

If this were to occur, commodities and futures markets could see increased activity, while investors could look to invest in oil exploration and development companies who will look to ramp up their efforts to producing more oil to capitalise on demand. Moreover, industries that are reliant on oil-derived products or services – such as transport or manufacturing – could also receive a boost that investors could benefit from.

On the other hand, oil prices could continue be strangled by a lack of economic growth and activities, as well as seasonal patterns. Therefore, investors might think about pivoting to assets and sectors that tend to show resilience when the economic environment is challenging, such as healthcare, tech or consumer staple stocks.

Meanwhile, within the energy sector itself, a focus on renewable energy sources such as solar, wind, and hydroelectric power could provide a more sustainable long-term investment strategy. As the world transitions towards greener energy solutions, companies operating in the renewable sector may experience increased demand and growth potential, irrespective of the trajectory of oil prices.

In conclusion, the outlook for oil prices in the coming months remains uncertain, marked by a complex interplay of factors that could either drive prices higher or hold them back. Therefore, prudent decision-making and a well-rounded investment strategy will be key to navigating this unpredictable terrain, and investors should remain aware of key indicators such as economic growth, inventory levels and significant changes in supply.

Stavros Lambouris is the CEO at HYCM International.