By Peter Nurse
Investing.com -- Oil prices fell Tuesday, handing back some of last year’s late gains on concerns global economic growth will slow sharply in 2023, weighing on crude demand.
By 09:25 ET (14:25 GMT), U.S. crude futures traded 2.2% lower at $78.53 a barrel, while the Brent contract fell 2% to $84.19 a barrel.
The crude market closed 2022 with sharp gains as markets bet on resurgent demand as China, the largest importer of crude in the world, announced a fairly abrupt reopening from COVID-19.
However, the tone has changed on the first full day of trading of the new year following a warning from International Monetary Fund Managing Director Kristalina Georgieva that the global economy faces “a tough year, tougher than the year we leave behind.”
“We expect one-third of the world economy to be in recession,” Georgieva said in an interview with CBS. “Why? Because the three big economies — U.S., EU, China — are all slowing down simultaneously.”
The decision by Beijing to relax anti-COVID measures in December, following a year of strict restrictions on activity, has resulted in an unprecedented spike in infections, and also volatility in the crude markets.
“Traders are still deciding which reopening playbook to follow for China, Eastern, or Western fashioned. In optionality, this is where a good chunk of volatility sits,” said Stephen Innes, managing partner at SPI Asset Management.
“On a western style reopening where economic activity accelerates right out of the gates, we could see oil quickly move to Brent $100 bbl; however, its equally possible growth may soften during the early stage of reopening, similar to the experience of several East Asian economies that previously implemented relatively tight Covid controls. Hence in that scenario, Brent oil ascendancy could be more muted, but a more back-loaded positive "reopening impulse" in Q2 could then take us up to Brent $100 bbl.”
There is also the supply side of the equation to digest.
Russia's crude shipments slid to the lowest for 2022 in the final four weeks of the year as sanctions crimped Moscow’s exports.
With the war in Ukraine showing no signs of ending any time soon, and the Organization of Petroleum Exporting Countries constrained by the extent they can pump, this suggests that global supply will remain tight for much of 2023, ensuring the crude market remains supported to a certain extent even if there is a global recession.