Bears, Bulls Argue Over China's Effect on 2023's Oil Markets

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Editorial by Geoffrey Lakings for Industrial Info Resources (Sugar Land, Texas)--Oil and gas prices will slump, unless China's economy grows faster than expected, Fitch Solutions forecasts.

January 2023: It has definitely been an interesting start to this year for Crude & Products. Prices already are yo-yoing from a high near $83 early in January, to a low near $70 just last week. At first, bears seemed to have clawed control of the markets, as many thought an economic crisis would affect Global GDP, and hence energy demand.


Graph from FXEmpire

Hart Energy: In a weakening global economy, crude oil will trade at about 10% lower in 2023 than the 2022 average, Fitch Solutions forecasts.

Fitch Solutions expects China's economy to grow 3.6% in the coming year, unlike the European economy, which is forecast to contract, and the U.S., which is primed for an anemic 0.3% growth.

But China's economic performance was only one of several macroeconomic factors recently outlined by Cedric Chehab, the global head of country risk for Fitch Solutions. The chief expectation is a sharp slowing of global growth, from 3.1% this year to 1.9% in 2023. Except for the pandemic-induced slowdown in 2020, such a decline would be the slowest pace of growth since the global financial crisis in 2007-2009.

However, of late, bulls have charged back onto the Street to wrestle market psychology from the bears, with the portent of China consuming copious amounts of hydrocarbons.

From OilPrice.com: Bullish Sentiment Builds as China's Recovery Continues
"Brushing aside the massive inventory build in the U.S., the market is starting to fall for China's demand rebound. Both OPEC and the IEA raised their global demand forecasts for 2023, arguing that the second half of this year would see rapid growth in Asian buying. So it looks like oil bulls have gained the upper hand despite some worrying economic data and refinery problems in the U.S."

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For these crude-oil bulls, there is another wildcard at play: What will it mean when G7 imposes sanctions not only on the Russian crude barrel but in a few weeks the Russian refined products?

• Reuters: G7 agrees to review level of price cap on Russian oil in March: Group of Seven officials have agreed to review the level of the price cap on exports of Russian oil in March, later than originally planned, in order to give time to assess the market after more caps are placed on oil products from Russia, the U.S. Treasury said on Friday.
  The coalition plans on February 5 to set two caps on Russian oil products: One on products that trade at a premium to crude, such as diesel or gas oil, and one for products that trade at a discount to crude, such as fuel oil.

But setting these Russian refined products price caps will be both challenging and complicated.

• Reuters: Yellen says setting price caps on Russian refined oil products 'complicated': Yellen said setting the new price caps had proven "more complicated" than for crude, given the range of different refined products and price structures, and the importance of ensuring continued supplies of Russian diesel to the market.
  "It's more complicated, but we've been working hard to figure out how to achieve the same objectives," as with the broader cap on Russian crude, she said.
  "You know, there's always the potential that things may not go according to plan, but we've studied these markets very carefully and we believe that we're going to come out with a set of caps that will achieve the same things that we've achieved with crude so far," she said, adding that adjustments could still be made over time.

And to no one's surprise, Russia is not sitting idly by as these Western sanctions on its crude oil and refined products are being imposed.

• Energy Intelligence: Russia's Response to G7 Price Cap Takes Shape: Details are starting to emerge about how Russia will implement President Vladimir Putin's ban on sales of Russian crude oil and refined petroleum products that comply with or are linked to the G7 price cap mechanism.
  Business newspaper Kommersant reported that the government is preparing a regulation that would prohibit references to the G7 price cap in sales contracts and make Russian producers responsible for ensuring broad compliance with the ban.
  Putin signed a decree on Dec. 27 prohibiting exports of Russian crude oil and petroleum products that comply directly or indirectly with the G7 price cap. The government is expected to implement the decree by February 1.

While this "tit for tat" between the G7 Western World and Mother Russia are taking place, diesel markets are preparing for a chaotic February ahead.

• OilPrice: Diesel Markets Brace For A Chaotic February: Yesterday, strikes began at three refineries in France operated by TotalEnergies. The three facilities suspended gasoline and diesel deliveries for the wholesale market, and one of them reduced its run rates to a minimum.
  Across the Atlantic, refiners are preparing for maintenance season. According to Reuters, this season will see twice as many refineries shut down for repairs to compensate for delays in maintenance during the pandemic. Less gasoline and diesel fuel will be produced and, consequently, less will be exported to Europe.

So, interesting times indeed lie ahead for these crude & product markets.

Therefore let IIR Energy's Dedicated Market Research place the world at your fingertips. Tomorrow's News Today. Ask us! We have answers!

As your feedback is very important to us, please let us know if we can provide additional color or answer any other market questions.

Additional IIR Resources:

• IIR Team Email: iirteam@iirenergy.com
• Latest IIR Crude & Products Market Scorecard

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