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Oil's decline set to slow on China rebound, Russia sanctions

written by Bella Palmer

Bank of America (BofA) expects Brent to average $100 a barrel in 2023 on a Chinese oil demand recovery and a drop in Russian crude supplies of about 1 million barrels per day amid EU sanctions

A rebound in oil demand in China, the world's top crude importer, and sanctions on Russian crude will support crude prices going into the next year, analysts have said.

Brent crude, the benchmark for two thirds of the world’s oil, has lost about 15 per cent of its value over the last month as concerns of a global economic slowdown weigh on the short-term oil demand outlook.

Bank of America (BofA) expects Brent to average $100 a barrel in 2023 on a Chinese oil demand recovery and a drop in Russian crude supplies of about 1 million barrels per day amid EU sanctions.

This month, the EU and the Group of Seven advanced economies agreed to place a price cap of $60 on global purchases of seaborne Russian crude.

The ceiling aims to reduce Moscow’s oil and gas revenue, while maintaining adequate supplies of crude on the global energy market, preventing a surge in crude prices as a result of an EU ban on Russian seaborne crude.

While the sanctions are intended to curtail the cash flows of Russian energy, their real impact, in fact, remains to be seen, said Ehsan Khoman, head of emerging markets research at MUFG Bank, in a podcast.

Potential consequences could include higher transport costs for the global market across the board to higher crude oil prices, Khoman said.

UBS, which has taken a more bullish stance on crude prices, expects futures to surge to $100 a barrel in the coming months.

Next year, the growth in oil demand will primarily be driven by emerging Asia, which includes China, India, Indonesia, South Korea and Malaysia, the Swiss lender said.

The US Energy Information Administration (EIA) expects Brent crude to average $92 a barrel in 2023, $3 lower than its previous estimate.

Global oil stocks will fall by 200,000 bpd in the first half of next year before rising by about 700,000 bpd in the second half, according to the EIA.

Meanwhile, the Opec+ group of oil-producing countries has shown its willingness to act quickly to protect high oil prices.

The group, which slashed its collective output by 2 million bpd, said this month that it would stick to its oil production targets.

But the group said it was ready to address ‘market developments’ and support the ‘balance of the oil market and its stability if necessary’.

EU sanctions on Russian crude, including a ban on refined petroleum products that comes into effect on February 5, are expected to lead to a ‘further reallocation’ of trade, the International Energy Agency said.

Russia’s oil production could drop by 1.4 million bpd in 2023 after the sanctions come into effect, the Paris-based agency estimated.

This is in part because both China and India, the third-largest crude importer, are unlikely to increase their imports of discounted Russian crude.

China's oil demand has lagged expected growth as Covid continues to beset the country and there are also limits to how much India is willing to take from Russia, said Khoman.

Vessels from Russia take several times longer to reach India than those departing from India's usual suppliers in the Middle East, free shipping capacity, meanwhile, is scarce.


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