Cheers Everyone!

Big picture (Macro)

What a week we had here in the oil market. $8 move to start the week, followed by 2 days of retracing and consolidation. Is this rally the real deal or like the last few we've had before making new lows?

Well, let's just say I think we are very close to the bottom here. I sized into my long position a week ago from today as you all know. I've taken a look around and I really don't see a fundamental catalyst to go much lower than $70.

The next push down would be around the $65 area but in all honesty, that's where it ends. It would be a violent move lower followed up by a violent buying spree. Aka, we wouldn't stay down there for very long.

Right now this week showed me the bulls are here and here to stay for the fight. First three days were explosive followed by a 2-day retracement and breather. THIS IS HEALTHY.

Small picture (Next week)

Plan: 

Bull case (My lean): We bid straight from here and get back over $76 following a push to our short term micro targets.

Bear case: $73.50 breaks, and we revisit the last support at $72.

 Price Targets (Upside): We are consolidating here, which makes for choppy trading. BUT, we clear back over $76 and all of the micro trades are back in place. 

Price Targets (Downside): Support is holding here at $73.50, if that fails we will see $72.05 guaranteed.

Fundamentals

Interest rates

Another day, another round of rate hikes. On Thursday, central banks were once again under the limelight. The BoE and ECB followed suit a day after the Federal Reserve boosted borrowing prices by half a percentage point, as both banks combat double-digit inflation. The slowing of rate hikes by the world's main central banks signals that we have reached peak inflation. Nonetheless, indications of future rate rises across the board fueled concerns about economic growth, weighing on the forecast for oil consumption. The threat of more tightening dampened risk assets, notably crude oil prices, which lost three days in a row.

The news that segments of the Keystone pipeline that were not impacted by last week's oil leak are restarting operations added to the negative mood. Reports from the Nigerian government that oil output will rise from roughly 1.2 million barrels per day to 1.6 million barrels per day in the following quarter also kept buyers on the sidelines. Meanwhile, Equinor of Norway reported the start of pumping from the second phase of its massive Johan Sverdrup field, resulting in an increase in output of 185,000 bpd. Despite yesterday's hiccup, the two major crude benchmarks are still on course for their greatest weekly increase in over two months. Those banking on rising oil prices are wagering everything on an increase in Chinese oil demand. However, as we will see later, the storm comes before the recovery.

China Update

China's economy is still weak, according to the most recent data. Industrial production and retail sales both went down even more in November, reaching their lowest levels in six months, according to numbers that came out earlier this week. This comes after trade data showed that both China's exports and imports dropped sharply last month and PMI surveys showed that the economy is still getting worse. But the country's oil market doesn't show the same signs of macro weakness. In November, China's refineries processed the same amount of oil as 14.51 mbpd, up from 14.22 mbpd in October. This was the most oil they processed in a year. Also, in November, China imported 11.37 mbpd of crude oil, which was the most in 10 months.

This good result doesn't show how badly Covid restrictions have hurt the economy. But this has less to do with how much people buy at home and more to do with how much people buy from other countries. A lack of diesel around the world and the ability to get cheap crude oil from Russia raised refining margins and pushed Chinese refiners to increase production. In November, the amount of goods shipped went up to 6.14 million tonnes, which was the most since April of last year. This was a 37.7% increase from October and a 46.4% increase from November 2021. Two new refineries that started up also helped the refineries make more. China may end the year with record shipments of important fuels for transportation in December. Reuters recently said that China's exports of gasoline, diesel, and jet fuel could reach between 6.5 million tonnes and 7.1 million tonnes next month.

In short, China is a country with two different stories: one is about strong exports, but the other is about weak domestic consumption. This year, demand in the country that imports the most oil is expected to go down for the first time in 20 years. But as China moves away from its strict zero-Covid policy, this should soon change. After almost three years of trying to make sure there were no COVID cases, China gave up on many key restrictions last week. This has given people hope that China's fuel use is now on the way back to normal. In fact, most people think that China's loosening of its strict zero-COVID rules is good for crude demand.

But it could be months before there is a big rise in local demand. As China learns to live with the virus, things could get worse before they get better. This is because the country will first have to deal with an exit wave of infection, which will slow down the economy and travel and, in the short term, reduce the amount of oil used. There are some signs that this is already happening. The U-turn on pandemic control came at the same time as a sharp rise in covid infections in Beijing and other major cities. An outbreak that can't be stopped will put stress on the country's health care system and hurt travel and business in the coming months.

Because of this, Chinese macro data and domestic fuel consumption are likely to stay low over the next few months as the country goes through a rough reopening process. Oil demand won't get back to normal until the second quarter of 2023. The latest forecasts from the IEA confirmed this. The agency thinks that China's demand for oil will keep going down in the current quarter and the first quarter of next year.

There is no doubt that China's decision to stop using harsh restrictions to fight the coronavirus will eventually lead to more oil use. Still, China's re-opening is not a quick fix for the weak demand picture. The country's fuel consumption is likely to rise again, but not as quickly as many people think. So, we would warn against jumping into the China reopening play too quickly.

Thanks for reading today's newsletter! Next one goes out Sunday night! Have a great weekend!