The China Reopening Trade Is Real And What It Means For Energy Investors

Back in October 2022 when we published the WCTW report titled, "The Path Forward Is Uncertain, But You Need To Be Prepared." We used the US Dollar and copper as our two most important macro signals to watch out for. Fast forwarding to today, both indicators are trending in the direction we want. 

Copper prices, as of this writing, are marching higher and staging a technical breakout. There are a lot of psychologically important technical levels it broke today with the resistance at $4 to start, but the timing of the breakout is what makes us more confident. Over the weekend, we saw the news that China has lifted restrictions on oversea travelers. This combined with the fact that COVID cases have started to peak in China's major cities is starting to send the signal to the market that the slowdown is behind us.

On the currency front, we are starting to see more material weakness in the US Dollar. The Euro has recently been a beneficiary of the warm weather we are seeing in Europe, but with global economic growth bottoming thanks in large part to the China reopening trade, we think the market has spoken, and we would be fools to not pay attention.

But as we have written over the last several weeks, the China reopening signal was simply a matter of time. As this pertains to the oil market, it also means that we are not completely out of the woods just yet. For starters, the macro signals are saying that growth will likely perform better than expected going forward, but that doesn't prevent oil inventories from building in the near term. Judging by the latest price action we are seeing on the physical oil market front, the Q1 2023 inventory build is still anticipated by the market, so unless something drastically changes (sudden supply loss), we need to get over this near-term hump.

With that being said, however, for those of you that are more long-term-minded investors than just one quarter, we think the opportunity is apparent. Pierre Andurand over the weekend shared his thoughts on where he thinks oil is headed, and spoiler alert, he sees it going to $140.

While we are very reluctant to make the call that he's making, what we can tell you with certainty is that everything about the 2023 oil market balance hinges on demand.