Oil expectations for 4th quarter of 2023

The crude oil market is driven by many different factors. Whilst some traders look to technical analysis, and others prefer speculative news, it's important to remember that crude oil is a relied-upon product that responds to the global economy and activity. In fact, it's a driver of the economy, and we're even seeing greater GDP output per unit of oil consumption.

Crude oil investing is a popular strategy as a result of this. Of course, traditional investment in oil is up in the air in a world that is attempting to turn to green energy. Crude oil investing through CFDs on the other hand is a strategy intended for experienced margin traders due to its inherent risks.

The first half of 2023 has seen a robust global economy, defying various obstacles such as soaring inflation, high-interest rates, and geopolitical unrest. This stable economic expansion has persisted into the third quarter, propelled by strong consumer expenditure, particularly in the services industry. Projections indicate a global growth rate of 2.7% for 2023 and 2.6% for 2024.

Risks Heading into Q4

While the outlook is generally positive for Q4, there are several factors that could derail this growth. High-interest rates in the G7 nations, excluding Japan, are a threat to consumption and crude oil demand in the Western world. Generally, crude oil futures enjoy periods of high consumption, as fuel-led courier and logistics activity increases, along with tourism.

Whilst demand has remained steady in the face of high interest, we may be witnessing a delayed impact from the rate increases. For example, 3-year fixed-term mortgages are common in the UK, meaning that a rate increase doesn't have an immediate impact on those households. But as more people move house, remortgage, and enter the market, then the increased repayments eat into disposable income. Likewise, rental markets have sticky pricing but are increasingly responding to higher buy-to-let repayments.

Uncertainties in China's economic performance are also a big factor, being the second-largest consumer of crude oil in the world. China is currently facing the possibility of a banking run due to a crisis in the property market. Billions are owed to small businesses from property developers, who have run out of money, and with property prices contracting. A bank run remains firmly in the hands of the government - who may decide to make bailouts - and refraining from doing so could lead to severe economic implications for large exporters, small businesses, and consumers.

Some other areas of concern are tensions in Eastern Europe, such as Poland's (potentially temporary) withdrawal of arms support to Ukraine in reaction to tension over grain imports - and the war itself.

Finally, sovereign debt rapidly rising in numerous economies is becoming increasingly worrisome. Global debt remains extremely high, despite pandemic stimulus being mostly abandoned.

Opportunities Heading into Q4

Conversely, there are factors that could bolster global economic growth that may have a positive impact on crude oil. A subdued inflation rate, for example, could give central banks the leeway to implement more lenient monetary policies in the short term. The Bank of England recently decided to stop hikes, although it was a very close vote, deciding that the potential damage to the economy (due to the lagging effect) could be too great to warrant. This could mean we have seen the highest rate in many economies, with only one way left to eventually go: down.

Emerging economies like India, Brazil, and Russia could offer unexpected boosts to the global economy, driven by domestic consumption and increased foreign trade. While India is having high geopolitical tensions with Canada - and therefore de facto, to some degree, much of the West - it has been one of the few bright lights in 2023, with the likes of Apple deciding to relocate manufacturing away from China and into India - a symbol of a potential greater shift that may with other US firms continue.

Furthermore, if China's growth exceeds expectations due to additional fiscal and monetary measures, it could lend further support to worldwide economic expansion. While China has been dwindling, it may still have a speedy recovery. The U.S. maintaining its current growth trajectory could also result in better-than-expected global growth rates; with a strong labor market and robust consumption.

Sectoral Contributions to Growth

The services sector, particularly areas requiring direct human interaction like leisure, travel, and tourism has been a significant contributor to global economic recovery this year - many people after lockdown were longing to escape the country on vacation, or even down the local bar. This is especially true for East Asia, where economic activity has surged following the lifting of COVID-19 restrictions earlier this year in China and Japan. Service sectors such as tourism have a huge impact on crude oil.

In the coming months, the focus will shift towards the interplay between the industrial and services sectors. While economies with a strong industrial base performed well during the pandemic, they are currently experiencing slower growth. The dominant role of the services sector is expected to diminish gradually, making way for the industrial sector to contribute more significantly towards the end of the year.

Oil Demand and Supply Dynamics

The sustained global economic growth is set to fuel an increase in oil demand, particularly due to the resurgence in tourism and consistent vehicular mobility. Oil consumption is predicted to rise by 2.4 million barrels per day (mb/d) year-on-year in 2023 and by 2.2 mb/d in 2024, according to the OPEC. By the end of 2023, the total global demand for oil is expected to exceed pre-pandemic levels, averaging 102.1 mb/d and increasing to 104.3 mb/d in 2024.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)