April 12, 2023 | Issue 21

Oil Market in 2023: the Party is Cancelled

Nikolay Stoykov
Managing Partner at Alaric Securities
  • OPEC plus, a group of oil-producing countries, led by Saudi Arabia and Russia announced it would cut production by more than 1.2 million barrels of crude a day — more than 1% of global supplies;
  • The move appears to be an effort to increase prices, though the significance is yet to be seen as the global economy slows;
  • The cuts are voluntary and start in May, and could be temporary depending on economic conditions.

If you follow the oil price, you must have heard that OPEC Plus surprised the markets last week with production cuts. This was REALLY surprising, and the price of most oil products went up about 4% the following day. Some analysts even started ‘seeing’ 100 USD per barrel in the future.

We at Alaric Securities do not have a crystal ball, so we really cannot ‘see’ into the future, but the future leaves its traces in the past and present. So, let’s take a look at a historical chart of oil (WTI spot price):

It does not take a genius to see that the oil spot price appears volatile. But even before discussing historical prices, we need to compare them correctly. Clearly, a price of 80 USD per barrel in 2007 differs from that of 80 USD in 2023! So, we will look at the cost of oil (WTI spot price) relative to the US CPI (US Consumer Price Index published by the Bureau of Labor Statistics). Here is what this looks like:

Date CPI WTI Spot WTI Spot as % of CPI
Jan 2023 299.2 79.2 26%
Jan 2022 281.1 80.2 29%
Jan 2021 261.6 52.2 20%
Jan 2020 258.0 61.3 24%
Jan 2019 251.7 53.8 21%
Jan 2018 247.9 64.7 26%
Jan 2017 242.8 52.8 22%
Jan 2016 236.9 33.6 14%
Jan 2015 233.7 48.2 21%
Jan 2014 233.9 92.7 40%
Jan 2013 230.3 97.5 42%
Jan 2012 226.7 98.5 43%
Jan 2011 220.2 92.2 42%
Jan 2010 216.7 72.9 34%
Jan 2009 211.1 41.7 20%
Jan 2008 211.1 91.8 43%
Jan 2007 202.4 58.1 29%
Jan 2006 198.3 67.9 34%
Jan 2005 190.7 48.2 25%
Jan 2004 185.2 33.1 18%
Jan 2003 181.7 33.5 18%
Jan 2002 177.1 19.5 11%
Jan 2001 175.1 28.7 16%
Jan 2000 168.8 27.6 16%

Let’s make sure you don’t get confused: In Jan 2023, the spot price of WTI was USD 79.20 per barrel. Since CPI in Jan 2023 was 299.2, the relative cost of the WTI spot was 26% of that of the CPI.

It may seem to you that picking a price only once a year, in January, is somewhat random. It is, since many of the extremes in spot prices tend to happen in other months — like the price spike in the summer of 2008 or March of 2020 lows but those are just extremes that are NOT representative of the long-term prices.

We will also look at some of the statistics on this new relative price variable — WTI Spot as % of CPI:

Statistics Historical Value What that means in 2023 Prices
Average 26% 79.2
Median 25% 73.4
Maximum 43% 130.0
Minimum 11% 32.9
25% Percentile 19% 58.1
75% Percentile 34% 101.6

For those of you that skipped statistics in college, we will explain. The table above shows that in April 2023, the WTI spot price was at its long-term average — 26% of CPI or 79.20. The WTI spot price distribution is quite volatile, and we can say that half of the price distribution (50% of the time) is between USD 58 and USD 101 per barrel (25% percentile to 75% percentile). Those values represent where we expect markets to fluctuate naturally without an adverse shock.

The distribution above correctly predicts that a price of WTI spot of USD 130 per barrel (or higher) is unsustainable in the long run and is not likely to remain. Similarly, a price below USD 32 per barrel would lead to a supply reduction and is expected to disappear relatively quickly (as we saw in April 2020).

OK, the WTI market is relatively balanced, but what does the future hold? We at Alaric Securities believe that markets, ON AVERAGE, are BETTER at predicting the future than any single trader or group of traders. While they are not always correct, ON AVERAGE, they are BETTER than ANYBODY! So, with that in mind, let’s look at the WTI Futures:

Month WTI Future Price Price as % Jun 2023
Jun 2023 80.63 100%
Dec 2023 77.01 96%
Jun 2024 73.68 91%
Dec 2024 71.12 88%
Jun 2025 68.78 85%
Dec 2025 66.89 83%
Jun 2026 65.07 81%
Dec 2026 63.54 79%

As you see for yourself, markets are predicting somewhat BEARISH scenarios for the future prices of the WTI spot. So much so that the price for Jun 2026 contract is 21% below the expected levels of Jun 2023. This should NOT be a surprise — Central banks worldwide have raised short-term rates to record highs to combat inflation. While markets are already pricing in the Fed starting to lower rates in the fall of 2023 (from levels last seen in 2008), the ECB is expected to raise rates even further in 2023. This hawkish interest rate policy has caused consumers to retreat and has put a damper on hopes of a quick economic recovery in 2023. Moreover, the global economy has yet to feel the full effect of those higher rates truly.

In conclusion, oil prices are inherently tied to global economic growth. With interest rates in most major economies at record highs, global economic growth is expected to be rather sluggish in 2023. While global economic forecasts for 2024 are much better, the WTI futures calls for the continued weakness of oil prices.

If those forecasts are accurate, and we believe they will be, the oil sector will NOT benefit from that recovery. Therefore, we at Alaric Securities suggest our clients KEEP AWAY FROM the sector or AVOID it entirely.


Trading Economics

CME Group


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