Rising recession fears and major hedge fund liquidation rumors caused oil to wipe out all its gains for the entire year. The selloff is based more on fear than reality, but fear can be a powerful motivator, especially when the Federal Reserve is telling you that they are not going to allow a lot of market optimism and telling the market they have it wrong.
The market is also selling off on weak economic data in China, which is offsetting the news that there are more signs that China will lift covid restrictions. China reported that November trade data fell 8.7% from a year earlier, and imports fell 10.6%, much weaker than market expectations.
This comes as the American Petroleum Institute (API) reports a major crude oil supply drop of 6.426 million barrels. On the flip side of that, the API also reported an impressive 3.55-million-barrel increase in distillate inventories. That shows that U.S. refiners are continuing to rise to the occasion to try to meet winter demand and the impressive string of distillate inventory increases. That is easing some concerns of shortages this winter. The API also reported a bearish 5.93-million-barrel increase in gasoline supplies. While increases in gasoline supplies at this time of year are somewhat seasonal, it plays into the slowing demand slash recession mantra.
Add to that talk in the marketplace surrounding Bridgewater Associates. Reports say they were dumping all their oil positions. If true, maybe they were trying to lock in profits ahead of the end of the year, or Ray Dalio decided he wanted to go green. Or maybe they see a looming recession. Regardless, the market had better see a recession and a drop in demand quickly because global inventories are still too tight.
Against the backdrop of the European price caps, there are signs that Russia may start reducing its oil exports. Tanker Trackers reported that Russia’s seaborne crude oil exports have halved in the past 48 hours. That is even as the price cap is below the cost of Russian crude. Reuters reports that Russia’s Urals blend crude for delivery to Europe was quoted at an average price of $55.97 on Tuesday, below the cap and down from $61.35 on Sunday.
The Guardian reported that the number of Russian-affiliated oil tankers “going dark” to avoid being tracked in the south Atlantic has doubled in recent months in a clandestine sign trying to avoid sanctions. By switching off their tracker systems on the high seas, the ships can quietly transfer oil onto tankers without links to Russia to avoid their oil exports being flagged.
Oil supplies are still being backed up in Turkey, yet members of the G7 are saying they don’t blame the price caps. Reuters is reporting that disruptions in tanker traffic from Russia’s Black Sea ports to the Mediterranean are a result of a new Turkish insurance rule, not the price cap on Russian oil agreed by a coalition of G7 countries and Australia, an official with the group said on Tuesday. Of the 20 loaded crude oil tankers facing delays in the region, all but one appears to be carrying Kazakh – not Russian – origin oil and would not be subject to the price cap “under any scenario,” the official said.
The oil markets plunge moved us into contango as traders now are seeing the possibility of the market moving from an undersupply to an oversupply.
The EIA, in their “Short-Term Energy Outlook (STEO),” seems to confirm that, saying that the global market right now is undersupplied but will be well supplied later in the new year.
The EIA reported that global oil inventories will fall by 0.2 million barrels per day (b/d) in the first half of 2023 (1H23) before rising by almost 0.7 million b/d in 2H23. That, they say, would leave global oil inventories higher at the end of 2023 than they had forecast in the November STEO, which lowered their Brent crude oil price forecast to $92 per barrel (b) in 2023, $3/b less than they had forecast last month.
EIA said that they expect natural gas prices to increase from November levels as a result of both higher winter natural gas demand and rising LNG exports. Our forecast for the Henry Hub spot price averages more than $6.00 per million British thermal units (MMBtu) in 1Q23, up from November’s monthly average of about $5.50/MMBtu.
They expect natural gas prices will begin declining after January as U.S. storage levels move closer to the previous five-year average, largely because of rising U.S. natural gas production. However, the possibility of price volatility remains high.
They raised the forecast for U.S. natural gas production by almost 1% in 2023 compared with last month’s forecast. They also said they continue to expect natural gas production in the Permian Basin to be limited early in 2023 by the lack of pipeline capacity to bring associated natural gas production to market; we expect that these constraints will be resolved earlier than we had previously assumed. This change also contributes to slightly more crude oil production in 2023 than we had previously forecast.
EIA says that Freeport LNG announced its export terminal would resume partial operations exporting liquefied natural gas (LNG) in mid-December following an outage that began in June 2022. They expect Freeport LNG will ramp up utilization in the coming months and will reach full capacity by March 2023.
Yet, at the same time, demand could surge in China. Reuters reports that China on Wednesday announced the most sweeping changes to its resolute anti-covid regime since the pandemic began three years ago, loosening rules that curbed the spread of the virus but sparked protests and hobbled the world’s second-largest economy. The relaxation of rules, which includes allowing infected people with mild symptoms to quarantine at home and dropping testing for people traveling domestically, is the clearest sign that Beijing is pivoting away from its zero-covid policy to let people live with the sickness.
The bottom line is even though the market has given up a lot of gains. We still think there are significant risks in this market to the upside.
If Russia decides to reduce supplies or if OPEC has second thoughts about their production levels, you can see a game-changing move very quickly. Weather forecasts are going to become key because the supply tightness problem could be unmasked if we get a very cold winter.
That goes for both natural gas and products. Unless demand continues to see a big drop, crude supplies are going to plummet in the coming weeks. At some point, that may start to matter. Regardless, get ready for continued volatility because I think it’s just getting started.