Opportunities in Oil Autumn 2023

First scenario: oil above $140?

The development of oil prices for the rest of this year will depend on several factors. The main one is the current geopolitical tensions in the Middle East. The region is crucial for oil production and any escalation of tensions could drive oil prices significantly higher. The launch of a ground operation in the Gaza Strip, which seems imminent, may be enough to reach the $100 per barrel Brent level. This will anger the Arab states, which hold the price of oil in their hands and will probably not be afraid to use it as a political weapon. The possible involvement of the US in the conflict, either militarily or through sanctions, could drive oil prices even higher. Traders should therefore keep a close eye on any news regarding the escalation of the Israeli conflict. Although diplomatic negotiations are currently underway the US in particular seems keen to prevent a ground operation. This has caused a significant correction, with the price of a barrel of Brent oil falling below 88 dollars.
 

_{Brent crude oil in MT4 platform on D1 timeframe}

The worst-case scenario for oil prices would be the involvement of Iran, Lebanon, and possibly the US in the conflict. In such a case, the oil price could even hit historic highs of around 140 dollars per barrel. However, such high oil prices would not last in the market in the long term - firstly, they incentivize non-OPEC producers to pump more oil into the market to take advantage of the favorable prices. Higher supply will then drive the price down. Similarly, at this level of oil prices, demand falls as fuel becomes too expensive and people will push off trips that are not necessary.

A possible rise in oil prices as the conflict escalates to international proportions could cause a similar increase to the start of the war in Ukraine. The current situation would thus be strikingly reminiscent of the 1970s when two oil crises caused a huge rise in inflation in the US. The first oil crisis can now be seen as the outbreak of war in Ukraine, and the current conflict in the Middle East may escalate into the second. This situation would cause a lot of volatility in the markets, high oil prices would probably stir up inflationary spirals in Western countries again and this would make the job of central banks more difficult. High interest rates could thus persist longer than expected and economic growth would therefore be threatened. This means that trading opportunities could be not only in oil but also in stock indices or currencies.

The second scenario: oil below $80?

The situation in China will also be crucial for the development of oil prices - there is mixed data from its economy, but there is still an imminent threat of a fall into deflation and a reduction in economic growth. Developers are still in big trouble, casting a bad light on the entire Chinese economy. Virtually every week we read articles about bankrupt developers. If China does not wake up quickly, oil prices could fall again. However, China's Q3 GDP showed some hope, coming in at 4.9% compared to the same quarter a year ago. The market was expecting only 4.4%.

Even Q4 should be a good one in China in terms of GDP, growth could be above 6%, as Q4 of 2022 was relatively weak. Thus, the major US banks expect China to again reach the originally projected GDP growth of over 5% for the full year this year. However, we do not expect a significant increase in oil demand in China by the end of the year, the country has oversupplied oil at lower prices and its demand could therefore fall slightly by the end of the year. We see more room for surprises on the flip side here - lower than expected GDP growth, a significant drop in exports and imports, a renewed slide into deflation or further problems for developers are factors that every commodity trader should be watching.
 

_{Chinese GDP development. Blue year-on-year comparison, black quarter-on-quarter. Source: Statista}

Equally important, however, will be the situation in the US, where interest rates are likely to be higher for longer. Sooner or later, this is bound to have an impact on unemployment and the oil price may fall due to the expected lower demand. Moreover, US oil production has reached an all-time high in recent weeks. The US is aware of the upside risks associated with current oil prices and is looking for additional sources. Inflation and high fuel prices are one of the main issues and the presidential election is fast approaching. As a result, intensive negotiations are currently under way with Venezuela, which has long been under sanctions because of its political regime. However, the next presidential elections in Venezuela could be more democratic and the US is negotiating with the country to expand oil production. Venezuela is an extremely important player as it sits on the largest oil reserves in the world. While Venezuelan oil is very heavy and the cost of processing it is high, expanding production and exports could also drive down oil prices. While this will be more of a longer-term factor here, any positive news on the US-Venezuela negotiations could drive the oil price lower.
 

_{Countries by known oil reserves (billions of barrels)}

But the key will be the oil production of the OPEC cartel and Russia - they now hold the oil price in their hands. High oil prices are very comfortable for them and, given what is happening in the Middle East and the possible weakening of the Chinese and US economies, we cannot expect any early expansion of production. However, the OPEC cartel has at least confirmed that its production will not change before the end of the year. So at least the fear of further oil cuts has left the market for now. However, with further escalation of tensions in the Middle East, further production cuts or export restrictions may be a real possibility. So we can expect a lot of volatility by the end of the year due to the factors mentioned above, risks can now send oil prices either way. For active traders, oil thus remains one of the most rewarding instruments. There are thus too many variables to predict oil prices for next year, but it is quite possible that we will have to get used to higher oil prices. Even with global oil consumption expected to rise again next year, we expect the average price of Brent oil in 2024 to be around $90 per barrel.

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