Cheers Everyone!

Big picture (Macro)

(Monday)

Monday, I posted the following targets to the upside resulting in all of our short-term targets to be taken out today. This was expected and traded accordingly. We also had a little bit of a news shocker when oil inventories hit the news wire today. The largest build in inventories since February of 2021.

Here are the numbers:

US DoE Crude Oil Inventories (W/W) 06-Jan: +18.961M (est -2.000M; prev +1.694M)

Distillate: -1.069M (est -1.350M; prev -1.427M)

Cushing: +2.511M (prev +244K)

Gasoline: +4.114M (est +750K; prev -346K)

Refinery Utilization: +4.5% (est +4.5%; prev -12.4%)

You read that right, 18M barrel build in oil and a huge 4m barrel build in gasoline products. So why the rally? Thank the replenishment of the SPR to keep the floor around $70.

Today

How I traded it:

All week we had been building a consolidating triangle, the breakout was incoming. After inventories created the volatility for us to get into the trade, longing $75.75 after our first micro target had been hit. We had been long since the test of the minor support posted on Monday, but we never like to gamble and took profits at the first micro target today and stayed on the sidelines until the numbers hit the wire.

Can this rally be sustained? Let's look to tomorrow. Remember, when it comes to trading, we trade level to level. One level fails, our bias flips.

Small picture (Tomorrow & Rest of the week)

Plan:

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Fundamentals

The R-word

Another day, another depressing report on the state of the world economy. The world economy could experience a second consecutive three-year recession in 2023, the World Bank warned. The institution reduced its growth predictions from 3% for both this year and next year to 1.7% and 2.7%, respectively. The downgrades were attributed to abrupt slowdowns in the world's three largest economies, the US, the eurozone, and China. Market participants are preparing for tomorrow's US inflation data, to stay on the macro front. The information should make the potential course of US interest rate increases more clear. In either case, it is unlikely to stop the Federal Reserve from further tightening policy, which will not help the already bleak macroeconomic outlook.

Oil fundamentals are currently being overshadowed by economic worries. This is true despite updated EIA oil forecasts. The agency increased its estimate of the growth in global oil demand in 2023 by 50,000 bpd, to 1.05 mbpd, yesterday. It also revised its prediction for the production of crude this year. In contrast to the previous estimate of a 470,000 bpd rise, the US crude supply is now anticipated to rise by 550,000 bpd to 12.41 mbpd in 2023. Meanwhile, traders are alarmed by a rise in US oil stockpiles.

China Update

After a terrible year in 2022, China is off to a fast start in 2023. Last weekend, the nation ended the final tenet of the zero-Covid policy and lifted quarantine requirements for incoming travelers, effectively reopening its borders after three years of Covid isolation. An increase in fuel demand is expected now that China has formally ended its zero-COvid strategy. During the upcoming Lunar New Year holiday period, Beijing anticipates that the total number of passenger trips will more than double from levels in 2022, but will still be roughly 30% below the pre-pandemic record set in 2019.

Authorities issued a sizable batch of permits for independent refiners to import crude oil soon after the country's re-opening. China announced a second round of import quotas for 2023, increasing the total for this year by 20% in comparison to the same period last year. Chinese authorities have increased export quotas for refined products by 46% from the same period last year, which is another indication that China's refiners may import and process more crude in the coming months.

All of this supports predictions that Chinese demand will pick up once the exit Covid wave subsides. According to some estimates, this year's reopening of China may increase global oil demand by 1 mpbd. However, despite China's aggressive start to the year, the price response has not been as favorable as one might have anticipated. In fact, since China began loosening Covid restrictions six weeks ago, oil prices have dropped. This might suggest that China's reopening isn't a surefire way to see prices rise. Market participants are beginning to realize that China's return to normalcy won't be sufficient to sustainably raise oil prices above $100 per barrel.

An increase in global growth is necessary. Yet, high inflation and tightening credit conditions limit the outlook for the global economy. Despite having peaked, inflationary pressures are still alarmingly high and could persist for years to come. The major central banks of the world have not changed their hawkish stance in the interim. The Federal Reserve noted smaller rate increases earlier this week, but stressed that this should not be interpreted as a sign that their commitment to combating inflation is waning. There will likely be more rate increases in the future, which is not good for the economy. Overall, major Western economies are on the verge of a recession this year, which will have an impact on emerging-market economies. Oil prices will be affected negatively by the possibility of a recession. Or, to put it another way, the macro outlook at the moment does not indicate that oil will rise in the near future.

The reopening of China is a positive development for those who anticipate higher oil prices. However, even though this is a crucial piece of the price jigsaw for 2023, there are still a number of other factors at play, the most important of which is the worsening outlook for the global economy. The likelihood is decreasing from 3.2% in 2022 to less than 2% this year for global economic growth. With the global economy slowing down, China alone will find it difficult to raise oil prices back into the triple digits. Those who have placed all of their eggs in China's reopening would do well to understand that the prospect of a price rally over the upcoming months depends on more than just that.

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