Thinking Out Loud - What Am I Seeing This Year?
Please read last year's thinking out loud piece published on March 7, 2022.
With all things related to the act of predicting, there's a very high likelihood I will be wrong. But these write-ups are meant to help readers understand how I am viewing the market this year. Similar to the write-up we wrote last year in March, these thinking out loud pieces can also serve as good tools to go back and see where we got things right and where we got things wrong.
I think in order for me to explain what I am seeing, we have to first understand the environment we are in today.
Global recession fears remain.
Fed continues to tighten with more hikes on the horizon.
Inflation estimates are starting to drop.
OPEC+ reduced production in its October 2022 meeting and won't be changing its policy until June at the earliest.
Russian crude exports have not fallen yet.
China has abandoned its zero COVID policy. Reopening is in full force along with stimulus to the economy coming.
US shale oil production has grown and exiting 2022 at around ~12.4 million b/d, but the pace of growth is expected to materially slow by H2 2023.
Non-OPEC ex-US supplies are facing material headwinds as long-cycle capex projects fall off.
Energy was the best-performing sector in 2022 with the tech sector being the worst.
With all of that being said, there are two important themes we need to get right this year:
China's rebound in oil demand.
Fed policy, or more importantly, the market's perception of the Fed's policy.
Why are these two themes the most important?
Because in many ways, demand is the ultimate swing variable this year, once again, for the oil market. Similar to 2022 when we said that demand was the key variant perception, this year is no different, but this time, the variable is in one country's hands.
By our estimate, a successful China reopening could imply a swing of ~2 million b/d for the oil market balance. The swing is rather steep and will have important consequences for 1) global inflation expectations and 2) what the Fed will have to do in response.