Oil prices rose on Friday and are on track to post modest, second-year gains in a tumultuous year marked by tighter supplies due to the Ukraine war, a strong dollar, and weakening demand from China, the world’s largest importer of crude oil.
Brent crude futures rose 20 cents, or 0.2%, to $83.66 a barrel as of 0445 GMT, after falling 1.2% in the previous session.
Brent looks determined to close the year with a 7.6% gain after jumping 50.2% in 2021. Prices peaked at $139.13 a barrel in March, a level not seen since 2008 when Russia invaded Ukraine, triggering energy security and supply concerns.
West Texas Intermediate (WTI) crude traded at $78.63, up 23 cents, or 0.3%, after closing 0.7% lower on Thursday. It is on track for a 4.5% increase in 2022, after a 55% increase last year.
While the increase in year-end holiday travel and Russia’s ban on sales of petroleum products support oil prices, the decreasing consumption due to the economic environment that is expected to worsen next year is likely to offset the tightness in supply.
The global unemployment rate is expected to rise rapidly in 2023, limiting energy demand. Therefore, oil prices are also likely to drop to $60 next year.
The US dollar rose and oil prices fell sharply in the second half of this year as central banks around the world raised interest rates to fight inflation. Dollar-denominated commodities have become a more costly investment for holders of other currencies.
Also, China’s zero-COVID restrictions eased in the last month of the year have stifled hopes of recovery in oil demand for the world’s #2 consumer. While China is expected to slowly recover in 2023, the rise in COVID cases in the country and global recession concerns cloud the commodity demand outlook.
The recent easing of travel restrictions was expected to boost oil demand, but the sharp rise in COVID cases in China has raised serious concerns about a potentially global epidemic.
In response to China’s rise in COVID cases, several countries, including the United States, South Korea, and Japan, are implementing mandatory COVID tests on travelers from China.
Looking at supplies, western sanctions will force Russia to export more crude and refined products from Europe to Asia.
In the United States, production growth in the top oil-producing states has slowed despite higher prices. Inflation, supply chain barriers, and economic uncertainty have caused executives to lower their expectations, according to a recent survey by the Federal Reserve Bank of Dallas.
This year has been an extraordinary year for commodities markets, where supply risks have led to increased volatility and higher prices. Next year is expected to be another year of uncertainty with a lot of volatility.
