The story of 2023 so far is that the global economy is doing better than expected and few assets benefit more from robust global growth than oil. But that's just the beginning of the bull case for crude right now.
Let's break it down:
1) China is back and we still don't know how much
China's covid deaths fell 72% last week. The numbers have been hard to believe but the signal is that covid is rapidly deteriorating and that the Chinese consumer will be fully back soon. One of the things that will spark is a surge travel, including international flights. Some analysts see that adding 1.5 mbpd of oil demand this year and famed oil trader Pierre Andruand has predicted China could add 4 mbpd in oil demand in total this year.
2) The global consumer is holding up
There was a significant amount of belt tightening in Q4 of 2022 as many countries and regions -- particularly in Europe -- braced for a recession. However the economy everywhere has held up and that newfound security will be an incentive for consumers to spend and travel this year.
3) Seasonals are positive
February through June is the sweet spot for oil annually and we're off to a solid start so far.
4) Technical breakout needed
The weekly chart of crude oil highlights the end of the corrective downtrend and a few months of sideways trading since. Notably, the lows have been high since December and the latest downdraft was rejected. The 100-day moving average is just above spot and that's an important level to watch. I want to see WTI above $85 to confirm the bullish thesis but it could be a quick trip to $100 from there.
5) Russia woes
On Friday, Russia announced it was curtailing 500,000 barrels per day of production for the month of March. They tied this to the products ban that went into effect on Feb 5 and said it was temporary but it's tough to believe anything from Russian officials right now. It could be that sanctions are biting and technology is tougher to find. What's not hard to believe is that we're in an energy war.
6) SPR is out of the picture
The 1 mbpd in releases from US reserves are over. Some production has stepped in to fill the gap but the mantra from oil companies continues to be discipline and shareholders punish companies that spend.
7) Natural gas associations
The rug-pull in natural gas prices will serve as a warning sign for oil companies. Gas prices were filled with $$4-5 decks as far as the eye could see and now it's trading at $2.40. That will harden supplier discipline but it will also take physical barrels off the market as gas drillers dial down production and the barrels from gas-heavy production disappear.
8) Watch the dollar
What could quickly send oil higher would be a stumble for the US dollar. Right now, that could go either way, particularly with CPI coming out on Tuesday. Normally, better global growth is bad for the dollar but we could also be near a time when the Fed signals rates rising even higher than 5.5%.
