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Oil Enters 2023 Amid Great Uncertainty

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

Oil Enters 2023 Amid Great Uncertainty
 
Harry Altham
Energy Analyst, EMEA & Asia

Brent began 2023 by rising above $86/bbl before falling by $1 by 11:30GMT, with the initial rise largely due to China’s demand outlook showing signs of strength. Having abandoned zero-COVID, Chinese COVID-19 cases boomed in the final two months of 2020, but the Google mobility index is showing signs of increased activity despite the latest wave of infections. The Government has also issued the four largest state refiners a combined 127M bbl export quota for Q1 2023, which is around 15M bbl more than in Q4 2022 and nearly 50% more than in Q1 2022. This may alleviate some of the pressure we are expecting to see in the Asian product cracks, which we see as narrowing in their deficit to Europe and the United States because of renewed demand from China – which could total as much as 1.5M bbd y/y across 2023. 

A key consideration for early 2023 will be the pressures placed on the wet tanker markets as a consequence of the $60/bbl price cap, which will limit how much crude China can import from Russia until the structural shortage of tankers can be met. The recently agreed closer ties between Saudi Arabia and China are clear signs that the world’s second largest consumer will continue to import from the Middle East, regardless of its desire to ramp-up imports from Russia. Given that Europe now looks to the Middle East as a key source for oil, tightness in regional markets could be particularly punitive for Europe in 2023; with a renewed bout of commodity-led inflation a distinct possibility in the months ahead. 

BOOST TO BRENT NET LONG TO START THE NEW YEAR
The aforementioned demand optimism out of China is boosting fund sentiment across the oil benchmarks; the net long in Brent rose by 44k lots w/w, which is the largest single-week rise in 18 months. Further signs of strength centre around the calendar spreads; the Brent prompt spread has strengthened to a backwardation of $0.37, having slipped into a contango on an intraday basis at times in December. We believe tightness in crude markets will push Brent into a deeper backwardation in the first six months of 2022, with reduced supplies out of Russia, as well as OPEC+ spare capacity considerations and Chinese economic reopening playing considerable roles in the months ahead. 
keystone pipeline up and running 
The Keystone pipeline has restarted full operations, three weeks after a 14k bbl leak shuttered the 600k bbd line between Northwest Canada and the key distribution centre of Cushing, Oklahoma. Due to the restored supply, we expect to see refinery run rates in the U.S. Gulf Coast tick up over the month of January. We expect the move to benefit Latin American importers of U.S. oil products   particularly in diesel; the Gulf Coast diesel crack has fallen by 15% today (to $45/bbl) due as expectations of greater supplies of middle distillates out of Gulf Coast refineries grow. Also aiding in the weakening of the crack is the seasonally weak demand indicators in the United States, with thin traffic and weak aviation data prevailing in the United States over the last two weeks. 
 
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