Over the past few weeks, oil prices were caught in a crossfire between concerns over a global banking crisis and worries about inflation, as we were approaching the US Federal Reserve’s decision to hike interest rates on 22 March. Bank failures, likely driven by tightening monetary policies, are obviously bearish at a first glance, but in this instance they carried a partly offsetting bullish impact on oil prices as they diverted central banks away from their hawkish stance on inflation. Thus, after the price of Brent crude had sequentially fallen in recent months to about $72 per barrel, it managed to bounce back, marginally at least, fluctuating at around $76 per barrel amid signs that the banking system remains sound and indications that crude balances will tighten in the second half of 2023.

The Fed’s decision to expand the discount window for commercial banks to help them meet their short-term liquidity needs, along with the US government’s promise to insure bank deposits, added calmness to the market, but also raised the specter of further acceleration in monetary tightening.

Currently, the oil market’s volatility is driven by expected changes in monetary policies, while oil market fundamentals seem to have only limited effect on crude price movements. Among other key levers are countries’ inventory policies, banks’ new oil market positions, OPEC+ strategy, oil demand developments in China, and the recovery of global aviation.

In Rystad Energy, we still believe prices will bounce back and likely exceed $100 per barrel in the second half of 2023. A key shift is brewing on the demand side, with India set to eclipse China as the biggest driver of global growth in oil demand. India’s ever-expanding population coupled with a lag in the conversion to EVs in road transportation are the key drivers for this shift. 

Moreover, there is a broadly held view that a tighter oil market is on the way, reflecting an anticipated rise in air traffic and Chinese demand in the second and third quarters. In addition, despite tightening monetary policies in advanced economies, lingering excess money supply will continue to support the purchasing power of oil consumers.

In Rystad Energy, we feel certain that fundamentals will play a significant role in determining oil prices, as there are already early signs of rising gasoline crack spreads as we approach the summer peak demand season in the Northern Hemisphere. Back in the driver’s seat, fundamentals can provide a higher call on supply and inventories as we move towards the second half of 2023.

Please make sure to register for the upcoming Rystad Talks Energy broadcast from the Americas, which will focus on the supply chain. The monthly corporate webinar will also include our latest market updates.