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Growing bullish trend in oil markets

Despite slowing global economic activity and risks of recession, oil prices may soon be back above $100 a barrel, sooner than analysts believed two months ago. Indeed, although slowing economies and fears of recession affected oil prices for months, the easing of the restrictions of the Corona pandemic in China, the “OPEC +” cuts starting this month, and the European Union’s ban on imports of Russian crude oil by sea next month, And the products, from February 2023, could lead to a significant tightening in the markets, and send oil prices back above $100 a barrel.
Over the past months, oil and other commodities markets have been closely watching China’s policy on coronavirus restrictions for signs of an upcoming surge in commodity demand. In this aspect, China recently indicated that it will ease some restrictions imposed to deal with the outbreak of infection. Indeed, on Friday, China eased some of its strict rules related to the Corona virus, including shortening the quarantine by two days for direct contacts of the infected and arriving travelers, and canceling the penalty for airlines that bring in many cases. Sudden lockdowns in China and slowing economies are bearish factors dominating the oil market. But analysts say that the bullish factors may have the upper hand in the near term after the easing of some restrictions in China, which leads to a rise in oil prices again by three places.
On the other hand, the “OPEC +” decision to reduce the group’s main production target by two million barrels per day, starting this month, has led to the stability of oil markets, which is the goal behind the group’s decision. Brent prices settled above $90 a barrel. The pressures here are more to the upside than to the downside, despite sharp increases in interest rates to fight inflation. In this regard, the head of commodity strategy at Saxo Bank said, earlier last week, that “oil markets are more at risk of moving ten dollars a barrel higher than lower.” The risk remains to the upside, he added, citing the first signs of China’s possible easing of coronavirus pandemic restrictions sometime next year, OPEC+ cuts, and EU sanctions on Russian oil. He noted that the market is tightening, and some oil product margins around the world are still very high.
Analysts believe that “OPEC +” is satisfied with the stability of Brent crude prices in the range of 90-100 dollars per barrel. But at the same time, they believe there is a real risk of excessive tightening in the markets in the next three to five months. In this regard, Goldman Sachs said in a note early last week that Brent crude may rise to $ 125 a barrel next year if China eases its policies regarding the Corona pandemic. Goldman’s current forecast for Brent crude prices for 2023 is around $110 a barrel, but there are also plenty of upside risks due to potential supply disruptions in Russia, Libya, Iraq and Iran. “The risk distribution around our current outlook for oil tends to be directly upward given continued strength in spot demand,” the bank said. After the “OPEC +” decision to cut production, another bank, Morgan Stanley, said in early October that oil prices would rise again to $ 100 a barrel faster than previously expected, and raised its forecast for prices for the first quarter of 2023 to 100 from 95. dollars per barrel.
In recent months, there have been many predictions and a lot of speculation about what might happen with the EU ban on imports of Russian crude by sea from next month, and oil products from February 2023. In this aspect, the International Energy Forum believes The Riyadh-based IEF said Brent prices could easily exceed $100 a barrel again if supply losses from Russia approached three million barrels per day when the European ban on Russian crude imports by sea takes effect next month. According to the forum, the world’s largest international organization of energy ministers, oil markets could lose between one and three million barrels per day of oil supplies from Russia when the sanctions take effect. In addition, there will be a lot of volatility as the embargo kicks in because there won’t be much transparency about the actual volume of Russian production leaving the market.
In light of these developments, ING Bank said earlier last week, “It appears that speculators are increasingly likely to be long positions in the oil market due to expectations that the market will tighten due to a combination of the EU embargo on Russian oil that goes into effect soon, In addition to the “OPEC +” supply cuts. He added, “These developments have changed the bank’s expectations for oil in 2023 from a previously expected surplus until mid-2023 to a deficit throughout the entire year.” Indeed, the relief will not last long in energy markets, as many investment banks now assume that with the European Union’s embargo on Russian crude and products, supply from Russia will drop by just over 2 million barrels per day in the first quarter of 2023.
Indeed, despite the global economic headwinds, the outlook for oil prices in the coming weeks and months is more bullish than bearish due to a combination of three main bullish factors: easing pandemic restrictions in China, OPEC+ cuts, The European Union has banned Russian oil imports by sea.