Oil prices may rise later this year

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Oil fell for much of the week. Yet it wasn't dragged down by fundamentals. Oil prices are down because many traders and investors are bracing for a recession. During the current quarter, oil prices have slumped by 20%. The reason, once again, had nothing to do with supply and demand dynamics. It had a lot to do with central bank policies and the Fed's rate hikes that have pushed the dollar a lot higher, making commodities cheaper.
On the fundamental front, the G7 is pushing ahead with the oil price cap. The EU is currently discussing yet another package of sanctions against Moscow following the news that four eastern Ukrainian regions would be holding referendums to join the Russian Federation.
The EU will ban Russian oil in Dec. This will take about 2.8 m bpd of Russian oil off the market and increase oil prices.
Meanwhile, OPEC+ keeps falling well short of its production targets, and this will likely continue. In addition, some analysts expect the cartel to implement more production cuts, further squeezing global supply.
Supplies are also tight due to under-investment in the sector.
In the U.S., inventories in the strategic petroleum reserve (SPR) are at the lowest since 1984, and this has to be replenished at some point in the future. The Biden administration has drained more than 200 m barrels out of the SPR to help stem the rise in oil prices.
The bad news is that even in a recession, oil prices can go higher, and this is exactly what some of those banks that kept JP Morgan company at last week's Congress hearing expected.
Actually, JP Morgan was one of the bullish forecasters. Last week, its analysts wrote in a note that they expected Brent crude to rebound to USD101 in the fourth quarter. The analysts cited tighter supply as the reason for their forecast.
Goldman Sachs is even more bullish. Three weeks ago, the bank's analysts said Brent could hit USD125 next year despite the G7 oil price cap. They remain bullish to date.
Morgan Stanley is a little more modest in its price expectations, seeking Brent crude at USD95 per barrel in the last quarter of the year. It's worth noting that this is a downward revision of the bank's price outlook for the fourth quarter, which happened 2 weeks ago, prompted by growing recession fears.
UBS also revised down its price expectations earlier this month, again citing recession concerns as well as the continued flow of Russian oil to Asian importers. That downward revision, however, brought Brent to USD110, with analysts noting it could rise to USD125 by the end of the third quarter of 2023.
The reasons that UBS gave for the expected rebound are as interesting as they are worrying. According to the Swiss bank, oil prices wouldn't rebound because of a recovering global economy. They would rebound because of the greater demand for oil products for electricity generation and because of tighter overall markets as the U.S. ends its SPR oil sale program.
The consequence of global inventory drawdowns is that once demand picks up, the upshot in prices will happen all over again. This is the ultimate reason why oil prices will likely soon be on their way back up. Supply growth is stalling while demand is about to pick up. And depending on how strongly it picks up, we could see a lot higher oil prices later this year or next year.