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Oil Prices to See Small Gains in 2023 Amidst Weakening Global Economy and COVID-19 Flare-Ups in China

Oil prices are expected to see only slight increases in 2023 as a deteriorating global economic outlook and resurgence of COVID-19 cases in China weigh on demand and offset the effects of supply shortages due to sanctions on Russia, according to a Reuters poll.

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The survey of 30 economists and analysts predicts that Brent crude will average $89.37 per barrel in 2023, a decline of approximately 4.6% from the $93.65 consensus in November. The global benchmark averaged $99 per barrel in 2022.

World to Slip into Recession in Early 2023 Due to High Inflation and Rising Interest Rates

According to Bradley Saunders, assistant economist at Capital Economics, the world is expected to enter a recession in early 2023 due to the impacts of high inflation and rising interest rates. U.S. crude is projected to average $84.84 per barrel in 2023, compared to the previous month's consensus of $87.80. Brent crude has fallen more than 15% since early November and was trading around $84 per barrel on Friday due to growing concerns about the outlook for oil demand growth in China, the world's largest crude oil importer, as COVID-19 cases surge in the country.

Oil Market Tight Despite Weakening Global Demand Outlook as Recession Fears Persist

Despite a weakening global demand outlook as fears of a recession persist, the oil market remains tight, according to Edward Moya, senior analyst with OANDA. Moya added that China would be the primary focus in the first quarter of next year. Most analysts predict that oil demand will increase significantly in the second half of 2023, driven by the easing of COVID-19 restrictions in China and a less aggressive approach to interest rates by central banks.

Impact of Western Sanctions on Russian Oil Expected to be Minimal

According to the poll, the impact of Western sanctions on Russian oil is expected to be minimal. Analysts at Goldman Sachs stated in a note that they do not expect the price cap, intended to give bargaining power to third-party buyers, to have an impact. Moscow signed a decree this week banning oil and oil products supply to nations participating in the Group of Seven (G7) price cap for five months starting on February 1st. Data and analytics firm Kpler noted that if a significant drop in Russian exports (which is not expected to occur), the Organization of Petroleum Exporting Countries and allies (OPEC+) will likely increase output to prevent prices from rising too high.