As OPEC+ production cuts take hold, Brent crude oil spot price forecast jumps to $85 per barrel

After OPEC+, consisting of 23 oil-exporting countries including Russia, revealed crude oil production cuts for 2023, the U.S. Energy Information Administration (EIA), the statistical and analytical agency within the U.S. Department of Energy, has slightly revised its forecasts, reducing OPEC production by 0.5 million b/d for the rest of 2023 and increasing the Brent crude oil spot price.

According to EIA’s April Short-Term Energy Outlook (STEO), the forecast for the 2023 Brent crude oil price has been increased by 2.5 per cent from the previous forecast, following OPEC+’s announcement about crude oil production cuts for 2023. As a result, the statistical and analytical agency expects the Brent crude oil spot price to average $85 per barrel in 2023, which is $3 per barrel higher than its March forecast.

This higher price forecast reflects a forecast for less global production in 2023 and a relatively unchanged outlook for global oil consumption. Despite EIA’s higher price forecast, recent issues in the banking sector raise the potential that economic and oil demand growth will be lower than its forecast, which has the potential to result in lower oil prices.

Even though OPEC+ plans to cut crude oil production by 1.2 million barrels per day through the end of this year, the Energy Information Administration expects 2023 global production of liquid fuels – encompassing gasoline, diesel, and jet fuel – to exceed 101 million barrels per day for the first time.

Joe DeCarolis, EIA Administrator, remarked: “The OPEC+ production cut is certainly significant, but we expect growing global production—especially in North and South America—to offset those cuts. We expect that world oil production and demand for petroleum products will be relatively balanced this year. The biggest risk to our April forecast is slower-than-expected economic growth, which would limit growth in demand for fuels such as gasoline and jet fuel.”

Furthermore, EIA expects U.S. gasoline prices to average around $3.50 per gallon (gal) this summer, peaking between $3.60/gal and $3.70/gal in June. In addition, the agency estimates that U.S. gasoline production will increase more than gasoline consumption in 2023, which would result in higher gasoline inventories, lower prices, and higher exports compared with 2022.

Thanks to mild winter weather in the first quarter of 2023, EIA says that natural gas inventories ended the withdrawal season (November–March) 19 per cent higher than the five-year (2018–2022) average. In line with this, EIA forecasts natural gas inventories will end the injection season (April–October) at 3.8 trillion cubic feet or 6 per cent above the five-year average.

“Across the oil price cases we examined, our models still showed average U.S. household gasoline expenditures remaining lower than last year,” added DeCarolis.

Moreover, EIA expects U.S. electricity generation from coal to be about 17 per cent lower this spring than in the spring of 2022, as about 5 per cent of U.S. coal-fired electric-generating capacity was retired over the past 12 months. Additionally, natural gas prices are also lower than at this time last year, which the agency expects to make coal less economical for electricity generation this spring. 

Based on the Energy Information Administration’s forecast, less demand, growing generation from renewable energy sources and lower natural gas prices significantly lower electric power prices in the forecast for 2Q 2023 and 3Q 2023 compared with the same periods in 2022.

“Lower natural gas prices and growing generation from renewable sources should reduce costs for generating electricity this summer compared with last summer,” concluded DeCarolis.

In a recent interview on Bloomberg Television, Ed Morse, Citigroup’s global head of commodities research, pointed out that oil demand was being “crippled” by the prospects of an economic slowdown and recession.

In light of this, Morse believes that Brent oil prices are likely to fall below $80 a barrel despite OPEC+’s recent efforts to support that level with new production cuts. Morse also predicts that oil prices could fall even below $70 a barrel.