It should be noted that the European Union reserves the right to withdraw from the price cap in the event of severe shortages of raw materials.
Sanctions on Russian oil are extended
The countries of the European Union, in an attempt to cut off the flow of funds to the Russian war machine, constantly extend sanctions on Russian energy resources. Since December 5, the EU and the UK have imposed an embargo on Russian oil supplies by sea, with a price cap of $60 per barrel sold from Russia to third countries.
If the sanctions introduced are actually enforced, this could be a serious blow to the Russian budget. Last year, the value of Russian oil exports slightly exceeded $100 billion, of which about 10% were sales to the EU. Due to the sanctions, the EU is forced to import crude oil from other destinations mainly: the United States, Norway, Saudi Arabia, Iraq or African countries. Therefore, there are quite a few alternatives available, so the scenario of independence from the Russian leadership is quite realistic.
OPEC, China and recession: the main factors of the oil price
The elements mentioned in the subtitle should be the main factors shaping oil prices next year, unless we witness the outbreak of an armed conflict within the borders of one of the major players in this market.
This month, OPEC decided to cut output by 2 million barrels a day, sending prices up more than 2% on the day the decision was announced. Cartel officials have insisted that they will study the market situation with the introduction of additional sanctions on Russian crude and a possible further opening of the Chinese economy as part of the relaxation of covid restrictions. This means that OPEC could be very active in manipulating its own production next year.
What may favour the demand side is that there is increasing talk of the possibility of further removal of economic constraints arising from China’s zero-blanket policy. If these announcements are actually implemented, which given the potentially low immunity of the Chinese public may prove difficult, Then oil prices will get a strong boost to rise north. Currently, WTI crude prices are within an upward movement, for which the first target should be the local resistance of $83 per barrel. If it is broken, the next target would be the November highs around $93.
On the other hand, we must bear in mind that a recession is increasingly likely in both the United States and the European Union. Under such macroeconomic conditions, energy commodities, including oil, tend to decline, due to weakening economic activity and lower demand. If a strong recession scenario materializes, this should be the dominant factor, which could raise the valuation of the WTI variety in question at least to the range of 60-65 dollars per barrel.
One of the most turbulent periods in the energy commodity market for many years is behind us. With the outbreak of war on the other side of our eastern border, the prices of the petroleum and natural gas soared, which in the following months caused growing concern in the European energy industry during the heating season. At the moment, the situation appears to be relatively under control, as reflected by earlier filling of storage facilities and declines in oil and natural gas prices compared to valuations in March this year.
However, a premature success cannot be declared, as the repercussions of this year’s turbulence are likely to be felt at least for the next year. In addition to the availability of raw materials on world markets, the price of these will also be key. Today’s analysis will therefore seek to answer the question of how the price of two key energy commodities may evolve and what will be the main drivers of prices in 2023.
The European Union has set a maximum price for natural gas
After weeks of heated negotiations, the European Union managed to agree on a common position on a maximum price for natural gas for the entire community. In the end, it stood at 180 euros per MWh. This is a significant change from the initial proposal of 275 euros, which was criticized by most countries, mainly because reaching that ceiling would only be an achievable situation in an extreme scenario. Germany’s resistance was mainly due to concerns about the availability of the raw material on the European market if the limit was set.
Although the cap has been reduced considerably, it is still quite possible that it will not be activated, as blue fuel prices continue to fall. It is currently around 105 euros per MWh and, if we do not witness any black swan, there is a good chance that it will fall even below 100 euros.