Cheers Everyone!

Big picture (Macro)

US DoE Crude Oil Inventories (W/W) December 9th +10.231m (best -3.5m, prev -5.186M)

• Distillate: +1.364m (est +2.5m; prev +6.159m)

• Cushing: +426k (prev -373k)

• Gasoline: 4.496M (est +2.5m; prev +5.319m)

• Refinery Utilization: -3.3% (est 0.0%; prev +0.3%)

We came right to my $78 target from yesterday and pulled back as expected to let things cool off. I think it's going to be a healthy "pause" day for oil. We've had a parabolic $8 move since Friday where I got long at the lows. If we can hold the $75 support, I look at this as nothing more than a simple consolidation before going to our first major macro target at $81.

Small picture (Today)

Plan:

Bull case (My lean): I think we chop today with a slight chance of a push higher. Consolidation is healthy after an $8 rally.

Bear case: Minor support breaks at $76-$75.75 zone. Would test $75 if that happens.

Price Targets (Upside): As long as 75 zone holds, we will see $78.20 -> 79.15 -> 80.18

Price Targets (Downside): $75 breaks -> 73.40 incoming (major support)

Fundamentals

Decently understandable

This isn't random. As noted yesterday, if OPEC's forecast on the global oil balance until early 2023 is accurate, then Brent's current $8/bbl increase since last Friday is not warranted. In its current monthly assessment, the IEA agrees passionately. Other short- and long-term changes were impossible to ignore. In a rising market, these elements wouldn't have added firepower, but after oil prices fell $24/bbl in a month, the temptation was great.

Northern hemisphere temperatures are falling. CME Heating Oil and ICE Gasoil are soaring. Since last week, the CME Heat crack has risen $15/bbl and the Gasoil/Brent differential has widened. Europe, North America, China, Japan, and South Korea will freeze. Keystone's force majeure is another short-term positive development. The pipeline's unaffected part is back up, but there is no full restart date. The closure did not affect yesterday's US stock figures, although crude oil inventory drawdowns in PADD 2 & 3 are likely in a week.

Better-than-expected US CPI numbers bolster optimism that borrowing prices will slow. If consumer price growth decelerates, peak interest rate forecasts may be lowered. First, US import prices declined for the sixth straight month in November, easing inflation. As investors gain confidence, they require less economic protection. The weak dollar has boosted oil's climb.

The Chinese leadership's turnaround on Covid infections has also boosted hope. A thriving Chinese economy boosts global oil demand, but the issue is whether the rise is immediate or will be delayed until next year. Flare-ups may operate as a brake on economic progress in the short future (last month's industrial production and retail sales were below estimates), but a stunning comeback in domestic road and air travel shows that China's oil consumption will expand when, not if. Due to China's reopening, some banks and consultancies forecast $90+ crude oil prices.

Finally, February 5 is the next important deadline for sanctions on Russia. When the EU bans Russian goods sales. A colleague of mine discovered a possibly pertinent headline: Europe and the UK bought 16 million bbls of diesel-type fuels at the beginning of this month in anticipation for Russian goods penalties. Next year, the center of the barrel might be the best friend of prices. Inflation, recession worries, global oil demand projections, and the oil balance have not been beaten. Sentiment has changed. Oil prices will continue to rise and fall, but a "sell-the-rally" mindset may have shifted to "buy-the-dip" last week.

One of the most pessimistic Petroleum Status Reports in recent weeks has being ignored. Refinery runs dropped 3.3%, adding 10 million bbls to crude oil stockpiles. Product stocks grew as demand slowed, although net exports are over 4 mbpd. Commercial oil stocks rose 14 million bbls, while WTI finished $1.89/bbl higher and Heating Oil rallied 18 cents/gallon. Even the Fed's warning that interest rates may rise further didn't dissuade purchasers.

Q1

Forecasting is more art than science since any method that predicts future supply and demand must include assumptions. Russia's assault towards Ukraine has made forecasting more difficult. Ironically, the three forecasting organizations agree on the deteriorating oil balance for early next year. OPEC's call was lowered. IEA lowered oil demand predictions for 1Q 2023 by 300,000 bpd. Global oil stockpiles will grow between 400,000 bpd (EIA) and 1 mbpd (IEA) in the first three months of next year if OPEC pumps 29.50 mbpd.

The market is glad to ignore it for the reasons outlined above. Despite sluggish demand growth at the beginning of next year, investors take heart from the facts that a.) OPEC is seriously committed to supporting the market, hence the deeper-than-planned reduction in its November output and b.) despite a rise in Russia's November oil exports, its revenue fell by $700 million due to cheapening outright prices and a deeper discount. Moscow may opt to decrease voluntarily to boost oil prices and profits. The 1Q supply surplus is considered as a small speed bump due to dropping OPEC+ output, rising Chinese oil demand, and strengthening economic statistics.

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