Will Oil Prices Head Higher In 2023?

• Oil prices have traded below $100 per barrel since the beginning of August.

• A recession could weigh further on global oil demand, though many analysts are bullish on oil in 2023.

• The looming EU embargo on Russian seaborne oil imports at the end of this year is also expected to push prices higher.

Oil prices have consistently traded below $100 per barrel so far in August, weighed down by fears of demand destruction, concerns about looming recessions in Europe and the U.S., and market apprehension about the economic growth in the world's top crude oil importer, China. 

But, absent a deep recession that would sink global oil demand, prices are set to increase toward the end of the year and early next year, some analysts say. Most point to the very limited spare capacity both with U.S. shale producers and the OPEC+ group as a key factor that will drive oil higher next year, even if global demand grows less than currently expected. 

The looming EU embargo on Russian seaborne oil imports at the end of this year is also expected to push prices higher as trade flows will have to adjust, once again, as they did in the first two months of the Russian invasion of Ukraine. 

In the bearish camp of factors stands the so-called Iranian nuclear deal, which, if agreed by Iran and the world powers, including the U.S., could return around 1 million barrels per day (bpd) of oil to the market within a year. 

However, just this week, the world's top crude exporter and OPEC top producer, Saudi Arabia, tried to talk up oil prices, saying that the partners of the OPEC+ group have "the means to deal with market challenges including cutting production at any time and in different forms."  Then there is the end of the releases from the U.S. Strategic Petroleum Reserve (SPR), currently set to end in October. The end of SPR releases could further tighten the oil market ahead of the winter while utilities in Europe and Asia are switching from gas to oil-fired fuel generation due to exceptionally high natural gas prices. 

Slowing economic growth and a possible Iranian nuclear deal are pulling prices down. But the gas-to-oil switch, the OPEC+ readiness to cut production again, very low global spare capacity, the end of SPR releases, and continued discipline from U.S. shale are all bullish for oil prices. 

A mild recession may not erase oil demand growth, many analysts say.  

Due to the very low spare capacity, "even if demand just goes positive at all even in a small way, I think then you are set for much, much higher prices," Neal Dingmann, Managing Director of Energy Research at Truist Securities, told Yahoo Finance Live  this week. 

"Domestically, whether it's oil or it's gas, these companies have very very limited incremental capacity at this time," Dingmann said, adding that with LNG demand in Europe soaring, the biggest gas producers in the U.S. "will continue printing money." 

Referring to global spare capacity, the energy expert said that "across the board at OPEC+, even included Saudi, there is not the spare capacity that people perceive there is."

Dingmann thinks that oil could slump to $80 per barrel this year, but then spike to $110 a barrel early next year, mostly because of the limited spare capacity for oil and gas production globally.