It appears that the US economy has survived the global central bank tightening after the recent US readings showing a stabilized job market. However, even if one assumes the US will help the world get past the threat of recession, an improvement in global energy demand is unlikely to surface quickly.
China’s economy might not have bottomed yet. Their data continues to disappoint. The leadership is discounting the prospects of stimulus, and there are reports that the government has ordered some heavily indebted local governments to halt infrastructure programs. In an ominous development, the Chinese brokerage firm Citic has put restrictions on short sales in the stock market, which raises suspicions that problems are unfolding under the surface. This suggests that their energy demand prospects could continue to deteriorate through the end of January, and because they are the world biggest consumer, this does not bode well for global demand, despite favorable forecasts from the IEA and OPEC last week.
With the petroleum markets bifurcated (crude oil supplies tight and product supplies burdensome) we expect crude oil prices to lag gasoline and diesel prices on any washout sparked by negative developments out of China. The case for crude oil to outperform the products is justified by recent US production outings due to extreme cold and by the fact that EIA crude oil inventories are running 18 million barrels below year ago levels while the product markets are 17–20 million barrels higher. We could see periodic surges in volatility from flash headline developments in the Middle East, which could also prompt crude to lead the markets higher.
Recent Commitment of Traders reports showed the spec and fund net long in crude oil was near its lowest level since 2012. Open interest seemed to bottom out just ahead of the December spike low, which was a sign of value around $70. This leaves open the possibly of a strong rally if traders become convinced that events could result in Iranian crude being blocked from the market. Pushed into the market, we would favor weakness in the products, but we also think traders should position for a retest of the December low at $68.28 in March Crude Oil.
Source: Â CFTC
Source: Bloomberg
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Originally Published January 2024
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