Cheers Everyone!

Big picture (Macro)

Where we started

Where we are 12/27/22

Where are we going?? (NEW PRICE TARGETS & UPDATED CHART)

What a few weeks it has been since we predicted the bottom in oil price. Our price targets, both micro and macro, were precisely met. Is the bottom really in? In our opinion, yes. It had a sound, positive upswing with appropriate consolidation in between. This is exactly what we were looking for.

Now, the macro story is telling us that demand is rising even in the wake of a recession. China is coming back online today after ending its zero tolerance covid policy. Biden continues to buy oil to restock the SPR, causing an artificial floor for oil (we see no lower than $65 from here). 

There are a few black swan scenarios that could materialize and send us lower. In order to finance its conflict in Ukraine, Russia keeps flooding the market with cheap oil. However, Putin stated over the weekend that he would be open to peace talks on this front. Another would be continued lockdowns in China, but after today's actions to start issuing travel documents for citizens and for Hong Kong, we don't see this as a risk as much. A rare increase in production from OPEC would be the final black swan.. Also unlikely in our opinion.

Let's dive into this week. Please note, we have extremely low volume this week with it being in between holidays. Expect extreme volatility.

Small picture (This week)

Plan: 

 Bull case (My lean): We take a short term dip back into the first minor support followed by a rally to the first micro target at $82.36.

 Bear case: $76 breaks its major support, $73.70 on deck

 Price Targets (Upside): We have our first micro target of $82.37 first on deck followed by our macro target of $84.74

Price Targets (Downside): Under $76 we would look to short with a price target of $73.70

Fundamentals

2022 Recap

So, it might be tempting to sum up the most important things that happened in 2022 and what drove them, but we won't do that. The Ukrainian war has been the most important thing to happen in the last ten months. A more pressing question is what to expect in 2023, how the war will affect the global economy and the oil balance, and, most importantly, if there is a real chance to end the conflict in the heart of Europe.

All signs point to Russia not being able to win this war. Vladimir Putin's original plan to use a blitzkrieg to take over its western neighbor failed. The Russians had hoped for a quick offensive, but the Ukrainian military's strength and the coordinated financial and political help from the West made that impossible. This was the first setback, which was made worse by the fact that the invasion actually brought allies closer together, which was not what Russia had hoped for. The invader is also hurt by the low morale of the occupying forces.

Second, Russia is on its own. Even though a lot of countries didn't say anything bad about Russia's occupation of Ukraine, Russia doesn't have many political allies. It has a lot of friends because it's good for business, but maybe no other country in the world wants its land except China. This means that any political support is just a show and not real. Russia can only rely on "friendly nations" because its cheap energy gives it an economic advantage. In the 21st century, you can't become or stay a major world power by turning against your current and past allies. Without a "shared identity" or "reciprocal obligation" on the world stage, the country will become even more isolated.

In 2022, there has been a clear trend that also makes the chances of Russian success less likely: the far right, autocracy, and totalitarianism are becoming less popular, and their power is falling. Think about the street protests in Iran and China, the recent Brazilian election that ended the Bolsonaro era, or the US midterm elections that led to Donald Trump's complete failure and made an increasing number of Republicans sad. Viktor Orban's Hungary, Recep Erdogan's Turkey, and Narendra Modi's India might be the only authoritarian regimes that make it through 2022 relatively unscathed. The message, on the other hand, is loud and clear: the despot is becoming less important, which could also be bad news for Putin.

So, let's move on to the next point. Seeing how Iran and China have broken the rules this year, Russia might do the same in 2023. Russia has always used oppression as a political tool, but protests on Russian streets won't help the Russian leader's case in Ukraine. In a recent TV speech, Vladimir Putin went out of his way to say that Russia is not to blame for the war in Ukraine and that Russia and Ukraine are "sharing a tragedy." Even though he pretends to be the fireman, it's becoming clear to Russians that he's the one who started the fire.

By the time the cold weather is over, Russia will be in an even worse position. It seems like making its energy exports into weapons was a step too soon, and the strategy was put into place way too soon. Europe has had plenty of time to fill up on gas by importing more LNG from other parts of the world and cutting back on how much it uses. After this winter is over, this leverage will go away even more, and the financial sanctions will also start to hurt more.

It's one thing to know that Russia will lose the war, but it's another thing to try to figure out how it will end. Will Putin give up at some point, or will he refuse to go quietly and be likely to use nuclear threats to keep the war going and make the inevitable happen later? Even though Ukraine hates Russia, will it and its Western allies be able to come to an agreement on a peace deal? Will they be able to think about what's best for the world as a whole and make Putin an offer that will save his face so he doesn't have to admit defeat in public? Will the punishment fit the crime, or will people be treated with more kindness?

These questions show what you can expect in 2023: not knowing what will happen. As long as the picture of Ukraine is unclear, people will worry about inflation and recession, and predictions about the oil balance will also remain unclear. When you look back at 2022, you can get a good idea of what will happen next year. Between February and December, the forecast for oil demand in 2022 was cut by more than 1 mbpd, and the forecast for non-OPEC supply was cut by the same amount. This is because forecasters tried to do the impossible and adjust their views as best they could in a geopolitical world that was changing quickly. The Ukrainian war has caused political and economic uncertainty that should last until 2023. At the moment, no one knows when the Chinese economy will reopen. The possible end of the war will make inflation much less of a problem, and China's return to normal will give oil demand a huge boost. The outlook for the world economy is good, and the oil balance is expected to turn tight. As with everything else, the most important thing to know is when. Just like we have done all year, we will do our best to answer your questions as they come up.

Energy Independence

The energy supply crisis around the world has been good to America. European and Asian buyers have been looking for US oil to replace the oil they can't get from Russia because of sanctions. This has led to a record amount of US energy exports. At the beginning of the year, the US sent out 7 million barrels a day of crude oil and fuel products. Exports have been averaging around 11 mbpd and have been close to 12 mbpd at times as the year comes to a close. In the week ending November 25, the US exported a record-high 11.8 mbpd of crude oil and petroleum products.

This rise in oil exports from the US has helped the country become less dependent on foreign oil. In the past, the United States has always bought more oil than it produced. Then, in October 2019, the country made history when, for the first time in the 70 years that the government has been keeping track of oil trade, it became a net exporter of crude and oil products. At the end of 2019, the US became the first country in history to be a net exporter of oil. In 2020 and 2021, the US continued to export more crude and fuel products than it brought in. This is likely to happen again this year, as crude and product exports have been averaging about 1 mbpd higher than imports so far. By doing this, it will be energy independent for the third year in a row, based on the definition of net export.

When we think about what will happen next year, we can be cautiously optimistic. After all, there is a good chance that the US will need to import even more oil as new restrictions on oil from Russia go into effect. So, the demand for US oil will go up even more in 2023. There are even rumors that it might start to export more crude oil than it imports. Since 2012, the US has been a net exporter of refined goods, but it still brings in more crude than it ships out. But that might change soon. Last month, the net amount of crude oil the US imported fell to 1.1 mbpd, which is the lowest amount since records began being kept in 2001. Five years ago, the country brought in about 7 mbpd of crude oil.

Rumor has it that the US is on track to become a net exporter of crude oil next year. But this depends on one big assumption: that shale oil production will increase more quickly. But the US isn't making as much crude oil as it used to because producers are getting more pressure from rising costs and a lack of workers. We expect that the US crude supply will grow by less than 500,000 bpd next year.

The issue of export capacity is another thing that could go wrong. People aren't sure if the infrastructure at US ports can handle more crude oil. Reports from different sources suggest that the country's export hubs are getting close to their limits. Last month, the Biden administration gave the go-ahead to build the country's biggest oil export terminal off the coast of Texas. This shows that more space is needed.

The recent decision by Washington to start the process of restocking the SPR is another reason why the export boom might not last. If domestic supplies are used to build up strategic stocks, there will be fewer barrels available for export. At the same time, the worsening of arbitrage economics is another reason to worry. In the last month, the difference between WTI and Brent has dropped below $4/bbl for the first time since June. When combined with rising freight costs, this could make it harder for the US to export. Since this is the case, there is no guarantee that next year's record US crude exports will grow. Still, it looks like the era of the US exporting a lot of oil is here to stay. In the coming year, the US will continue to be a net exporter of crude and products, which will cement its return to energy independence.

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