Fear of a looming recession has not shaken RBC Capital Markets’ expectation for oil prices to push higher in 2023.
The bank says the oil market is currently caught between “the strongest fundamental oil market set up in decades, maybe ever,” and a deteriorating macroeconomic backdrop threatening the outlook for demand.
In a note to clients on Wednesday led by global energy strategist Michael Tran, RBC called for the price of North American benchmark West Texas Intermediate (WTI) (CL=F) crude to average US$114 per barrel next year. That’s up from the bank’s forecast of US$96.50 in mid-February.
WTI fell 2.01 per cent to US$109 at 3:24 p.m. ET on Wednesday.
“Recession or not, we believe that the oil complex remains in a structural, multi-year tightening cycle that will go as far as demand will take it,” Tran and his team wrote. “Absent a recession, the tightening cycle clearly points higher, potentially significantly higher. US$150/bbl, US$175/bbl, US$200/bbl? Pick a number.”
Tran says the supply-side of the oil price equation has been largely de-risked by recent events.
“The supply-side shock absorbers have been removed from the market,” he wrote, referring to factors such as low global inventories, and a lack of spare capacity from OPEC and North American producers. “This is important given that supply-side catalysts have torpedoed the majority of the oil market rallies of the past decade.”
However, Tran says a “deteriorating macro backdrop and the looming threat of a recession” have left the demand outlook potentially the most clouded since the Great Financial Crisis.
“Assuming all remains on track, we could certainly envision a scenario in which spot benchmark prices test $150/bbl or higher on a protracted basis over the next 18 months. The high conviction view is a function of structurally tight inventories, not hanging our hats on potentially flimsy demand,” he wrote.
“Given recessionary scenarios in which demand is taxed at a similar rate as previous downturns, we could see a scenario in which prices retreat into the mid US$70/bbl range in the back half of this year,” he added.
Tran says this is not part of the bank’s base-case scenario, and places a 15 per cent probability on such an event.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.