Cheers Everyone!

Big picture (Macro) Week Recap

(Monday)

Monday, I posted the following targets to the upside that I was looking for and every single one of them hit with precision. Sometimes it's funny when you listen to the "experts" and talking heads on CNBC and Bloomberg spewing nonsense about oil prices and their future direction when they don't even trade the market themselves. Here at Gallatin, we trade these markets every single day. Stop trusting Wall Street with your bottom line and start trusting the people who are actively involved in these markets day in and day out.

Wednesday

How we traded it:

Our new micro target from Wednesday was hit yesterday and then we chopped around the rest of the day. This morning, we grabbed a new high before retracing back to our micro target (now short term support) before overtaking the level again which is exactly where we got long at. Today was very simple on light volume, slowly grinding higher and finishing the week above $80.

Although it makes us feel good that we are getting back to our version of the fair value for oil. The last 3 weeks has been a wild one. Let's recap shale we?

When we first launched this newsletter, we called the "bottom" in oil. Back then, our price target was $80 and we got there in a hurry. We cautioned that a short term reversion was needed and we went lower as expect. Since our "bottom" call we have move $10 up, $8 down, and $8 right back up. Volatility is fun unless you don't know how to play it. Then it becomes an unpredictable monster if you don't know what you're doing.

This brings us to next week, although our first big macro target is $85, the RSI (an indicator that measures overbought and oversold conditions) is showing extremely overbought at the moment. Next week we're predicting a little dip down into the $77.50 area before retaking $80 and onward and upward towards our fair value price of $85.

Today (Recap) & Next Week

Plan:

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Fundamentals

Inflation

Given the excitement surrounding the release of inflation data, yesterday was always going to be a US-centric session. And it did not let me down. Last month, inflationary pressures in the world's largest economy slowed even more. In December, consumer prices fell by 0.1% month on month, roughly in line with expectations. This reduced the annual inflation rate to 6.5%, down from 7.1% in November and the lowest reading in over a year.

Market participants welcomed the decrease in inflation. Expectations are high that the Federal Reserve will hike interest rates by a quarter-point at its next policy meeting. The prospect of a pause in interest rate hikes shook the dollar. The US dollar fell to its lowest level since last June against a basket of major currencies, allowing oil prices to build on recent gains. As a result, the two leading crude indicators have more or less recovered from the significant losses suffered last week. More price gains are expected as traders anticipate a further decrease in Russian supply and a return to normalcy in China's fuel demand. However, given the current state of the oil balance, renewed bouts of selling cannot be ruled out before then.

Russian Oil

Despite sanctions and efforts to limit Russian energy sales, the country earned €155 billion from oil and gas exports in 2022, a 30% increase over the previous year, according to preliminary data. High oil prices and rising exports bolstered the Kremlin's coffers. In 2022, Russian oil output will increase by 2% to 10.7 million barrels per day, while exports will increase by 7.5%.

This impressive feat, however, is unlikely to be repeated in 2023. Though it is still early, evidence suggests that Russia is beginning to feel the effects of last month's EU crude import ban and Western price cap. Exports suffered significantly in December. Bloomberg reported that the country's crude volumes fell by more than half in the week ending December 16. At the same time, the Russian crude discount to the Brent benchmark has widened significantly. Russia's flagship Urals crude oil is trading at a massive $37/bbl, or roughly 45%, discount to international Brent crude oil.

Russia's income has suffered significant losses as a result of the drop in exports and near-record-high discounts. The first month of the European Union's ban on seaborne imports of Russian crude and the G-7 price cap cost Russia an estimated €160 million per day, according to a report released on Wednesday by the Centre for Research on Energy and Clean Air, an independent Finnish think tank. Furthermore, in another sign of financial stress, Russian state budget revenue from oil taxes fell in December to 511.7 billion roubles, the lowest level since March 2021, according to Finance Ministry data. Simply put, the West's recent price cap and accompanying sanctions appear to be working.

Russia's 2023 budget is based on a Urals crude oil price of $70.10/bbl, which is significantly higher than current realizations. So it's no surprise that Moscow is facing a growing budget deficit. Russia incurred a $56 billion budget deficit last month, wiping out a surplus for the first 11 months of the year and producing its worst budget outcome since the pandemic's initial impact.

Nonetheless, there is a winner for every loser. In this case, it is the shrinking pool of remaining Russian oil buyers, which includes India and China. They are using the leverage provided by their status and the G7 sanctions to drive hard bargains, knowing that Russia relies on oil revenue to fund the war in Ukraine. Russia, to put it another way, has now become a price taker.

Russia's revenue is likely to fall further in the future. The impending EU embargo on Russian oil products, which will take effect in a month, will exacerbate Russia's financial difficulties. Selling less oil at lower prices will deplete Russia's war chest significantly. This will be welcome news to Western countries hoping to limit the Kremlin's funding from energy exports, Russia's largest source of revenue.

Faced with the prospect of further declines in oil revenues, Russia's energy ministry announced this week that it is working on additional measures to limit discounts on Russian oil prices compared to international benchmarks. So far, details are scarce, but Russia has already proposed establishing a price floor for its crude as a countermeasure. Having said that, a voluntary production cut may be the most effective way to preserve revenues. In response to the latest Western measures, the country's deputy prime minister has already hinted that it may reduce oil production by 5%-7%. This will help to raise overall energy prices and further tighten global oil balances. In any case, one thing is certain: Russia's windfall profit honeymoon is over as the sanctions storm hits.

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