Oil Prices: A Riddle in 2023
As fears of an upcoming recession grow among investors, oil prices fluctuate due to uncertainty that torments financial markets. Oil is one of the types of energy that fuels industry growth and affects consumer prices. Inflation has risen considerably in many countries around the world on the back of high energy prices.
Our blog aims to give you useful information regarding oil trading and prices to help you understand what’s happening in the oil market. If you are a beginner trader, we would recommend reading our comprehensive article titled: “Trading oil for beginners in 2023.”
OPEC+ caught in the crosshairs
The Organization of the Petroleum Exporting Countries (OPEC) and its allied oil producing countries have been targeted by governments and organisations that disagree with decisions over production cuts. Comments on OPEC+ policies have been focused on the need to keep oil prices low which could help bring consumer prices down.
On the other hand, OPEC+ officials seem poised to follow the organisation’s strategy, keeping oil prices at levels that would benefit its members. Haitham Al Ghais, the OPEC’s Secretary-General said last week that OPEC and OPEC+ are not targeting oil prices. Al Ghais told reporters that pointing fingers and misrepresenting the organisation’s actions is counterproductive, adding that “blaming oil for inflation was erroneous and technically inaccurate, given that there were other reasons contributing to inflation.”
The OPEC’s Secretary-General noted that the International Energy Agency (IEA) should not undermine future investments in the oil industry as it could cause more market turbulence.
Despite production cuts, oil prices are down in 2023
A report by Bloomberg, published on May 4th, said that although OPEC+ has moved forward with production cuts, oil prices are down by 14% this year. Economists suggest that recession fears and slow economic growth hurt oil demand. Market analysts at ANZ noted that “concerns about weakening economic growth in major economies saw commodities come under further downward pressure; sentiment is likely to remain bearish in the oil market.”
On May 3rd, the US Federal Reserve announced one more rate hike which had been forecast by economists. Just a few hours before the decision’s announcement, the West Texas Intermediate (WTI) June contract had dropped by 5.1% to $68.29 per barrel while the Brent settlement for June was 4.7% lower to $71.80, the lowest level recorded in more than twelve months.
Big Oil benefits
The 5 Big Oil companies (Total, Shell, BP, Exxon, Chevron) reported record combined profits of almost $200bn in 2022. The momentum of 2022 continues well into 2023 with Shell announcing on May 3rd stronger-than-anticipated first-quarter profit, beating analysts’ expectations. Shell’s CEO Wael Sawan said the company “delivered strong results and robust operational performance, against a backdrop of ongoing volatility, while continuing to provide vital supplies of secure energy.”
On May 2nd, BP published its Q1 2023 earnings report which showed stronger than anticipated profits in the first quarter ($4.96bn vs. $4.3bn expected) with its CEO noting in his accompanying statement that “this has been a quarter of strong performance and strategic delivery as we continue to focus on safe and reliable operations. And importantly we continue to deliver for shareholders, through disciplined investment, lowering net debt and growing distributions.”
Economists try to solve the oil prices riddle
Some economists suggest that oil prices fall although inventory figures also drop. Commodity analysts at Standard Chartered note that production cuts don’t seem to calm fears regarding a combination of weak economic growth and rising interest rates. In their report, they note that cuts will eventually eliminate the surplus that had built up in the global markets, and forecast that this could happen by November this year if nothing else changes from OPEC’s side.
Goldman Sachs (GS) economists suggest that energy stocks in general could benefit from the opening of the Chinese market. GS strategists forecast Brent and WTI crude oil could climb 23% and trade near $100 and $95 per barrel over the next 12 trading months.
Record oil profits cause reactions
Record profit figures cheered investors but also created a backlash coming from other factions such as politicians and environmentalists who suggested that oil companies should give some of their excessive earnings back to communities. According to them, a way to do it would be a windfall tax on profits.
Saudi Aramco’s CEO Amin Nasser told CNBC reporters in February that investing in renewable resources would need funds so a tax on oil profits could be the wrong idea. “I would say, it’s not helpful for them [in order] to have additional investment. They need to invest in the sector, they need to grow the business, in alternatives and in conventional energy, and they need to be helped.”
Oil trading and managing your risk
Oil prices fluctuations depend on many factors. There are many ways to invest or trade oil, such as investing in oil stocks and oil ETFs or even trade crude oil CFDs. However, as a beginner trader, you should watch out how you manage your budget and more importantly your risk. Wrong decisions could lead to fund loss which could jeopardise your financial plan and goals.
There are ways to reduce the possibility of a mistake and that can be done by educating yourself on how to use risk management tools. Brokers offer a vast range of educational materials, including e-books, webinars and how-to articles written by experienced professionals. Knowledge is power, so we’d like to stress how important it is to be prepared if markets move against you. Reducing your risk can give you some peace of mind and less anxiety while allowing you to enjoy your trading experience.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
