Oil Markets in 2023: The Year of the Aftershocks
Oil has always assumed a special position within the energy complex. Oil is a global and mature market, fungible, with many interrelated physical and financial layers, diverse set of players both on the demand and the supply side and has dealt with many shocks in the past (geopolitical and weather-related outages and demand shocks). Nevertheless, 2022 generated new types of shocks and the oil market has not been immune from government interventions which added new layers of uncertainty. However, despite the severity of the shocks experienced in 2022, the oil market through its various layers and players has shown strong resilience and continues to perform its key functions of price discovery and redirecting crude and products in the face of a massive shock. These shifts in trade flows will accelerate and consolidate in 2023, with wide implications for the structure of the market, price discovery, geopolitical relations, and the dominance of the dollar in oil trade. However, this has come at a cost. The trade routes have become longer and the cost of re-optimizing trade flows has increased, the adjustment in price differentials is sharper, the markets have become more segmented and less transparent and new class of trading entities have emerged. Also, refineries are having to change their crude slates resulting at times in sub-optimal use of crudes and supply of products. Most importantly, the current crisis is causing increased government intervention in energy markets including oil markets as energy security, alongside reducing emissions, becomes a key driver of energy policy. These government interventions have not yet reached their peak and are unlikely to be reversed anytime soon and the full impacts of which will become more visible in 2023 and beyond.