Jean-Pierre Durante, Head of Applied Research Pictet Wealth Management.

• Global oil consumption has declined by 2.4 million barrels per day year to date (ytd) as economic activity has weakened. With western economies likely to enter recession and a possibly chaotic exit from zero-covid policy weighing on Chinese economic activity, global oil demand is likely to remain subdued in H1 2023.
• By contrast, at 101.6 million barrels per day, supply is close to the all-time high (102.2 million barrels per day) reached in late 2018 and may not climb much higher. US shale oil production looks set to lose steam in 2023, non-OPEC+ countries are already producing above pre-pandemic levels, and Russian production is likely to remain capped by sanctions.
• With most OPEC members unable to fulfil their production quotas, spare capacity is concentrated in Saudi Arabia, UAE and Iraq. Indeed, Riyadh is back in the driving seat when it comes to future oil supply. OPEC+ is very likely to match a weakening of global demand with further cuts, thus putting a floor under oil prices.
• The oil market looks set to remain broadly balanced in the short term, but rising demand in the wake of full reopening in China combined with low supply elasticity may boost prices in H2 2023. We expect Brent oil to reach USD115 per barrel at end-2023.
• The downside risks to this scenario for oil prices, from the most to the least likely, are: a deeper global recession than expected, weak Chinese economic growth caused by a chaotic end to zero-covid policy, further sustained expansion of US shale oil production, a settlement in the war in Ukraine, a decision by OPEC+ not to reduce supply, and regime change in Iran.