Oil Q4 2022 Fundamental Forecast: WTI May Fall as Growth Slows, Russia and Ukraine Conflict Evolves

• Crude oil prices may continue to fall as slowing growth cools demand
• OPEC+ machinations offer little practical impact on Crude oil prices
• Russia, Ukraine conflict might have scope to move off the battlefield

Crude oil prices seemingly caved under the weight of deteriorating expectations for global economic growth in the third quarter of 2022. The WTI benchmark is on pace to finish September with the worst three-month run since the onset of the Covid-19 pandemic at the start of 2020, shedding close to 20 percent. The analog Brent crude contract is on track to close out the quarter down about 17 percent.

These losses come even as Russia’s invasion of Ukraine continues to disrupt global supplies. Furthermore, the OPEC+ group comprising the producers’ cartel and its allies – a forum mostly fronted by Saudi Arabia and Russia – has switched gears to coordinated output cuts, having promised increases for much of the year. A shift in market focus from haphazard supply to deteriorating demand appears to be at work.

Crude Oil Suffering as Central Banks Fight Inflation

An aggressive push from global central banks led by the US Federal Reserve to rein in a dramatic rise in inflation has translated to a sharp downgrade of the baseline economic growth outlook. A survey of economists by Bloomberg now puts worldwide GDP growth at just 2.5 percent next year, down from 3.6 percent as recently as early March.

The real yield on 2-year Treasury bonds rose from -3.01 to 1.77 percent over this period. This is as monetary tightening drove up nominal rates while pulling down priced-in inflation expectations. That puts the real cost of near- to medium-term borrowing within a hair of the 2018 peak at 1.9 percent. At the time this was reached, it was the highest level since early 2009.

The rapid rise in lending rates makes funding economic activity of every kind more expensive. It is then hardly surprising that expected growth rates have plunged, pulling cyclically sensitive crude oil prices down in tandem (albeit with a brief detour in early 2022 as the Russian invasion began). The Fed has loudly signaled unwavering commitment to continue brisk tightening in the coming months, keeping these dynamics in play.

Is Russia Ready for a Ceasefire with Ukraine?

Energy prices may face added selling pressure if the conflict in Ukraine begins to move off the battlefield, deflating the geopolitical risk premium still embedded in prices. A Kremlin move to mobilize 300,000 reservists to protect the “homeland” in late September as the breakaway Donetsk and Luhansk regions of Eastern Ukraine rushed referendums on Russian annexation may signal that such a turn is on the horizon.

Skirmishing along the Eastern Ukrainian frontier dates back nearly 8 years. The action early this year seems to be Moscow’s attempt to decisively settle the matter in its favor. Now, a force two-thirds larger than what Russia has deployed in Ukraine thus far seems to be gearing up to prevent backsliding on territorial gains from 2014. This was when pro-Russian separatism became a military effort and Crimea changed hands.

Coming amid a spectacularly successful Ukrainian counter-offensive, such fortification suggests the Kremlin may no longer see a favorable settlement being had by force. This may mean it’s ready for a ceasefire. That might be welcomed by all involved. Kiev could trumpet that it withstood the invasion, the West can bask in having repelled Russia without boots on the ground, while Moscow will have functionally consolidated 2014 gains.