Cheers Everyone!

Big picture (Macro)

Well I did it... I specifically waited for this newsletter to go out when I thought the bottom for oil was in. In the last newsletter I wrote a month ago, I called for sub $80 a barrel was needed but then I noticed on the daily chart a massive imbalance that I missed at $70.06. This is trader language for market inefficiency and we all know markets love to be efficient. With that said, I started into my swing trade long above the highs of $120, specifically I purchased the September 2023 contract at $71.50 on Friday.

Now, is this the low? Who knows! But I did start sizing into my swing trade long but there is one more imbalance (small) on the weekly chart around the $64 range but I'm personally ok with it going down and tagging that first. What I'm telling you is, we are $5+- from the low and this is where I'm starting my long. Honestly, the fundamental backdrop is just so robust on the bullish case of oil, I'm honestly surprised we've stayed down here as long as we have.

In summary, yes the bottom is in. +-$5 from this level here. I will add to my long position above $76.25 and again at $82 and I will hold to $120 on the September contract.I love having on a trade where my upside is $60+ and downside risk is $5-$7.

Small picture (Tomorrow)

Today was a great day in the oil markets. My issue is, little too far a little too fast. We did get a break of structure which is very bullish but we did leave this little section highlighted that needs a little love. A break of this level and we will head under $70 temporarily.

Plan for tomorrow:

Bull case (My lean): We go lower overnight and into the open, hold these levels and bounce above $75 which would be a major trend change and a start of this new bull market that is now fundamentally and technically sound to do so.

Bear case: A loss of $70 would continue the trend to the mid $60's.

Fundamentals

Confidence is in limited supply.

The impact of the EU embargo on Russian oil exports and the associated G7 price cap, the deteriorating global oil balance as reported by the EIA on Tuesday, China's turnaround in managing the pandemic, and the overall battle to reduce global inflationary pressure were the main focus points last week. Looking at weekly settlement prices, it is reasonable to conclude that investors are more apprehensive about the present and near future than they were previously - risk was off. Last week, the MSCI All-Country World Index lost 2.24% of its value. The S&P 500 index dropped 3.37%. Oil performed worse than stocks. There was no respite on Friday, as WTI and Brent both fell nearly 11% for the week. The dramatic change in the structure of the major futures oil contracts has been a clear indication of a shaky global oil balance. WTI's contango will only revert to backwardation after May 2023. Brent futures for the next three months are likewise trading at a discount to the succeeding ones. The January/February RBOB spread entered contango at the start of the months and has been growing ever since. All of this points to a well-supplied, if not over-supplied, market.

Russian Oil Boycott

The major goal of limiting the price of Russian export oil was to ensure uninterrupted supply while depriving the Kremlin of valuable petrodollar money. Last week's price action may indicate that the plan is working, but the cause for the price drop was not the continuous availability of Russian oil. The fact that 20 tankers are anchored off the coast of Turkey, ready to sail via the Bosphorus, bringing not only Russian but also Kazakh oil, demonstrates this. (This number has dropped to 13 over the weekend as the backlog has begun to thin.) Indeed, since the imposition of sanctions, the price of the Russian export blend has fallen. According to price monitoring agency S&P Global Platts, the value of Urals in the Mediterranean is approximately $26/bbl below forward-dated Brent, while in the NWE hub, this disparity is less than $31/bbl, a $3/bbl drop in a week. Add to that the drop in outright prices, and Urals at Rotterdam were evaluated at $44/bbl last Thursday, a clear indication that Russians are desperately seeking, but with little luck, to sell their oil.

Inflation

Will they or will they not? Last week's service sector statistics, which came in considerably better than predicted, dampened hopes of reducing the rate at which US interest rates are raised. A thriving economy will do nothing to alleviate inflationary pressures, so fears are mounting that high interest rates may be required for longer than expected to bring consumer prices down, prolonging the period of slow growth and possibly leading to recession. The producer price index was released on Friday, and it climbed quicker than predicted last month but less than in October. The Fed's (and other central banks', including the ECB's) interest rate decision this week will give some light on how monetary policymakers view the current state of the world economy.

The EIA's revised monthly report on oil balance revealed gloomy economic outlook, with significant negative revisions in oil demand. OPEC and the IEA will report their own conclusions tomorrow and Wednesday, which could confirm what last week's performance suggested: the year will conclude on a low note, with a substantial price rise not occurring until around early 2023.

Chinas Covid Plan

Two weeks of civil disobedience in China against mass testing and quarantines appears to be bearing results. The country's leaders are shifting their stance on Covid management. It is a recognition that the economic misery imposed by the obstinate measures will not be sustained. The latest figures reveal dropping factory gate prices and a significant slowdown in the rise of consumer prices, both of which portend sluggish economic activity. The abandonment of ruthless Covid tactics, however, is unlikely to give immediate relief, as infection rates are projected to skyrocket in the following months. As a result, a recovery in economic activity is only possible after the first quarter of next year.

Renewable consumption on the rise

The newest IEA renewable energy prediction reveals the impact of Russia's illegal assault on Ukraine on the transition from fossil fuel to renewables. The authors describe the developments as "turbocharged," as oil and gas dependency leads to a substantial push toward sustainable energy. By 2025, renewables will have surpassed coal as the primary source of electricity generation. Its share of the power mix is expected to rise by 10% throughout the projected period, reaching 38% by 2027. In five years, the installed capacity of solar PV will exceed that of coal. More than 570 GW of additional onshore wind capacity will be operational by 2027, doubling global wind capacity.

According to the IEA, Russia's invasion of its neighbor hastens Europe's energy transition. Because of the mix of climate goals and energy security concerns, renewable electricity expansion will more than double between 2022 and 2027. However, the growth of renewables in the transportation sector will be subpar.

In the next five years, China, India, and the United States will quadruple their renewable capacity increase. During the year 2022-2027, China will add about half of all renewable power capacity; in India, new installations will be dominated by solar PV; and in the United States, the Inflation Reduction Act will give critical support for wind and solar PV projects. Renewable capacity for hydrogen production will more than triple in the next five years. Biofuel demand will increase by 35,000 million liters per year between 2022 and 2027, but renewable heating will not rise quickly enough to reduce the usage of fossil fuels.

Oil balance in question

Bulls have taken a beating recently from both the left and the right, from recession-induced demand fears as well as a rising sense that a supply shock is not unavoidable. The perfect bearish storm has brought the price of Brent down more than 20% from its highs at the beginning of November. The EIA's new Short-Term Energy Outlook reaffirmed what the price movement indicates: a weakening demand outlook combined with a perceived increase in supply is currently creating an ominously gloomy fundamental backdrop. The most recent global supply-demand update resulted in upward revisions to global and OECD stocks.

The EIA's most recent scenario predicts a steeper reduction in average price for spot Brent next year than was predicted in November. The absolute price has also been reduced. Brent is currently expected to trade at $92.36 per barrel in 2023, down from $95.33 per barrel last month. (The current curve is approximately $78.50/bbl.) This indicates that the average price will be $9/bbl lower than the 2022 forecast, down from $7/bbl. The retail gasoline price in the United States is expected to reduce from $3.99/gallon to $3.51/gallon year on year, albeit it will still be significantly higher than the 2021 pump price of $3.02/gallon.

Given the uncertainty surrounding the global economy, assumptions can change quickly. For the time being, however, macroeconomic headwinds have caused the DoE's statistical arm to reduce demand estimates. The total negative revision for 2023 was 170,000 bpd. It is 130,000 bpd for the first half of next year. With non-OPEC production increased by 240,000 bpd in 2023, the demand for OPEC oil has been lowered by a whopping 410,000 bpd.

The first quarter's deteriorating demand and improving supply outlook is most obvious. Global consumption will be 140,000 bpd lower, but non-OPEC production will be 670,000 bpd higher than forecast last month. The rise will come from the Eurasia region, where supply for the first quarter of 2023 is now forecast at 13.09 mbpd, up from 12.49 in November. As a result, the demand for OPEC oil has decreased by 810,000 mbpd, from 29.91 mbpd to 29.10 mbpd.

Given that the EIA anticipates the producer group to supply the market with 28.67 million barrels per day over the first three months of the year, global oil inventories are still expected to fall by 430,000 barrels per day. This explains why the price forecast is so bullish. The EIA predicts a return to above $90/bbl by the beginning of 2Q 2023, albeit this 430,000 bpd global stock draw pales in comparison to the 1.18 mbpd depletion pace projected for the start of next year last month.

Oil inventories are predicted to increase by 460,000 bpd in the second and fourth quarters of 2023. As a result, OECD oil stocks, which are expected to be 2.744 billion barrels in the first quarter, will progressively increase to 2.816 billion barrels by the end of next year. While this is a significant rise (63 million barrels year on year), the EIA notes that OECD commercial stocks will stay towards the bottom of the 2017-2021 range. Replenishing them is a time-consuming process, which explains the somewhat optimistic price projection for next year. The EIA warns that any unanticipated disruption in oil supply will result in a sharp and large increase in oil prices.

It's worth noting that the forecast for the 2023 OPEC call was nearly identical in March - around 28.75 mbpd. Over the last nine months, global demand has been revised down by 1.70 million barrels per day (mbpd) and non-OPEC supply has been reduced by 1.77 million barrels per day (mbpd), yet oil prices are nearly half of what they were - the same OPEC call but a significantly different interpretation. Immediately following Russia's invasion of Ukraine, investors were concerned about supply shortages. Resurfacing economic concerns, as well as maybe misguided optimism in ample Russian oil shipments, make riskier assets, especially oil, temporarily unattractive.

Thanks for reading todays newsletter! Next one goes out tomorrow