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Thank you to all the traders and energy professionals! We look forward to see what 2023 has in store! This newsletter aims to be a companion for both traders and energy professionals, providing you with the levels and fundamentals we watch and trade daily. If you're a company looking for guidance, we offer and more in depth product by clicking the button below and learning more about it.

Big picture (Macro)

The Week Ahead

What a crazy start to the year. We have had no lack of volatility since we called the bottom in oil. $10 straight up followed by $8 straight down. In our opinion, this move was expected as the last two weeks of the year were filled with low volume, whiplashing price back and fourth.

We're experiencing a healthy "chop" between $70-$80 and creating a solid line in the sand that bulls need to make the push back into the $80s. Let's get into tomorrow.

Small picture (Tomorrow & This Week)

Plan:

Fundamentals

Bulls start the year on shaky footing

Bulls have suffered in the New Year. Last week, CME products fell 9% and major crude oil contracts fell 8%. Last week, global equity markets finished in the black, so inflation and recession fears were not to blame. Warm northern hemisphere winters and the resurgence of Chinese Covid infections after restrictions were lifted in December caused the drop.

Mild weather naturally lowers natural gas and heating oil demand. The CME futures contract fell 17% last week and European natural gas prices hit their lowest level since the Ukrainian war. China's rising infection and death rates have contributed to recent gloom.

Medium-term prospects have improved, which may explain stock market performance. A variety of US and European data suggest that inflation may have peaked in these economic powerhouses and that rising borrowing costs may not cause recession. Slower wage growth, a shrinking US service sector, and lower euro zone inflation suggest a soft landing. Despite a brighter economic outlook, central banks will have to raise interest rates, but at a slower pace. Avoiding recession will sustain global oil demand and growth. The gradual reopening of the Chinese economy and the EU ban on Russian product sales will boost prices. The foundation for re-visiting $100 is being laid, but the path will be rough.

More OPEC Oil

OPEC is slowly making more crude oil. No, neither you nor the author made a mistake with that last sentence. Even though the oil cartel made its biggest cuts since the start of the pandemic in November, oil production increased in the last month of 2022, according to two recent surveys. This week, a Bloomberg survey of OPEC production showed that the amount of oil available in December was 150,000 bpd higher than in November. Shortly after that, a survey by Reuters of OPEC production showed that it had gone up by 120,000 bpd in December over November.

This is not a story about a lot of people, but about a few. In fact, there is only one. Nigeria's oil production went up again, which helped OPEC's production go up again last month. According to a survey by Reuters, Africa's top exporter pumped 1.35 mbpd of oil in December. This was up from 1.18 mbpd the month before and the most in 10 months. Nigeria will have more to offer. Nigeria's finance minister said last month that oil production will rise to 1.6 mbpd by 1Q23. This is a big jump from August, when it was less than 1 mbpd. This month, OPEC's supply will go up because Nigeria will send more oil to the market. Even so, it's safe to say that the group will continue to produce less crude oil than its quotas.

Even though OPEC is making more oil, the two main crude oil prices went up yesterday as bargain hunters came back to the market to take advantage of the worst start to a year since 1991. A stock report from the EIA that was late because of the holidays also helped people buy. Last week, US crude stocks went up by 1.7 mbpd, which is less than the 3.3 million bbl increase that the API reported. This is because refinery crude demand dropped in the weeks before Christmas. For the first time in two years, refinery use rates fell below 80%. Also, SPR stocks fell again to 372 million bbls, which is the lowest level since December 1983.

In the last week of 2020, US crude oil production went back up to 12.1 mbpd. This makes the total increase in production for 2022 a small 300,000 bpd, which is 1 mbpd less than the peak production in March 2020. On the product side, stocks went down even though demand was going down. When compared to the API number of +1.2 million bbls, the decrease of 346,000 bbls in gasoline stocks is a good sign, and the decrease of 1.4 million bbls in distillate fuel stocks is also good news. As a result, US oil stocks at the end of 2022 were well below seasonal levels. The inventories of crude oil, gasoline, and distillates were 4.2%, 5.6%, and 11% below their five-year averages, respectively.

After last week's bloodbath, the oil market might be getting back to normal, but there isn't much room for growth in the short term. The outlook for the economy is not clear. Recently, the head of the IMF said that she thought a third of the world's economies would go into recession this year. Obviously, this will slow down the demand for oil. China, on the other hand, is a sore spot in the picture of oil demand. In China, the number of covid infections is going up, and many people are worried that this will slow the country's recovery. Overall, the markets expect the rate of growth in the world economy to slow down.

But even though worries about a recession are making oil prices go up right now, the outlook after this quarter is good. After this quarter is over, a lot of problems will go away, with China's Covid problems being the biggest. It is expected that the country's demand for fuel will return to normal in the spring, which will help both demand and prices. Together, the end of coordinated SPR releases and a drop of about 1 mbpd in Russian supplies mean that oil supply growth in 2023 is likely to be less than demand growth.

As oil supplies get tighter and demand grows, this should create the conditions for oil prices to go up later this year. So, it shouldn't be a surprise that people are calling for oil prices to go back up to the triple-digit range. UBS is the most recent company to join the $100 club. The Swiss bank thinks that the price of Brent crude oil will rise to $110/bbl this year. It is the latest in a long line of investment banks to say that oil prices will rise above $100/bbl again in 2023. The message is clear: once the oil market gets through the slowness of this quarter, it should be full speed ahead. As you know, we are also in the triple digit club towards summer and end of the year.

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