Oil drilling rig, tanghai county of hebei province oil fields in China
© Pan Demin / 123RF Stock Photo

Recession fears are hampering the outlook for crude oil, with economists at two major banks warning it could fall below US$100 per barrel in 2023.

A TD report last week said a mild recession in advanced economies could bring West Texas Intermediate (WTI) prices to US$70 “or even lower.” A BMO report Monday forecast WTI to average US$95 per barrel next year, but said the price could fall to US$75 in a recession (all figures below are in U.S. dollars).

Up until early summer, crude prices had held up quite well compared to other commodities, but “that narrative has shifted more recently,” the TD report said. WTI prices declined roughly 15% since peaking above $120 per barrel in June. As of 2 p.m. ET on Tuesday, WTI price was around $104 per barrel.

“Mounting recession fears, risk aversion and a soaring U.S. dollar that had been dealing a significant blow to the commodity complex more generally have spilled over into the market for crude,” TD said.

Even though crude prices could go lower in the coming weeks, “much of the bad news is already priced into the market,” TD said, forecasting prices to average more than $100 per barrel through Q3.

For 2023, the U.S. Energy Information Administration forecasts nearly $100 per barrel, with the assumption that global growth will be 3.4%.

TD Economics expects growth to be 2.7%. In the case of a U.S. recession, however, the firm forecasts a peak-to-trough GDP decline of 1.7% in Q1 2023 and a 1.5 percentage point jump in the unemployment rate.

“This alternative scenario would imply a much weaker demand profile,” the report said.

“Even under a conservative assumption where global oil demand only increases by half the amount assumed by the EIA in 2023, that would suggest a cumulative build in global inventories of over 600 million barrels next year, which would bring the stock of inventory back to a level not seen since November 2020 when oil was around US$40 per barrel.”

Geopolitical risks will likely continue to boost prices, it said, “[b]ut even factoring those in, this alternative recessionary outcome would be consistent with prices no higher than US$70-$75.”

BMO Economics forecast WTI to average $105 per barrel this year and $95 in 2023. The report noted downside risks from a recession but said the longer-term risks are “skewed to the upside” as the global oil supply recovery “appears to be under greater threat than demand.”

Even a major global downturn (which is not BMO’s base case) wouldn’t hit oil demand as much as in previous recessions, the report said, since the travel industry is still hobbled by labour shortages and lockdowns in China.

If a recession were to occur, WTI could fall to as low as $75 per barrel, BMO said.