TOCOM Energy

After substantial recovery in 2022 from the low crude prices and oil demand brought about by two years of the coronavirus pandemic, 2023 appears beset with uncertainties.

Sentiment shifted to the upside as time progressed, oil prices recouped most loses from the previous week as market watchers turn increasingly bullish over the demand outlook for China. March JPX Dubai futures was trading around $79.50/b, versus the previous week’s settle of $74.90/b. At the same time March ICE Brent futures was trading at $85.5/b, registering highest price of the year.
Intermonth spread of these benchmarks however, had failed to catch up with the upward momentum, which saw the ICE Brent and JPX Dubai front month and third month spreads down 12 cents/b and 9 cents/b respectively on Friday.

An historically warm winter across Europe has lead to the decline in gas prices, this is not good news for the energy complex as the immediate spot demand hit to oil from lost gas-to-oil substitution in Europe due to falling gas prices is estimated to be as much 1.5 million barrels per day.
At the same time, the same term structure for NYMEX WTI showed a persistent weakness since late December due to short term weak refinery demand and a slowdown in export although last week’s massive increase in US crude oil inventories, which ballooned by almost 19 million barrels was largely due to post-storm effects.

Optimism over China was enough to counter last week’s massive increase in US crude oil inventories. According to a senior health official, major Chinese cities have passed peak COVID-19 infections, with the number of patients in emergency wards dropping and patients in intensive care plateauing, easing earlier concerns about Chinese demand due to surging covid cases.
In the short term, Chinese Spring Festival travel rush is likely to further boost China’s gasoline, jet fuel recovery. Spring Festival refers to Lunar New Year in China. The Spring Festival travel rush officially sets in Jan. 7- Feb. 6 this year.

The initial estimation showed passenger travels during the Spring Festival travel rush to amount to 2.095 billion, jumping 99.5% year on year to hit 70% of the level in the same period of 2019. People would prefer to drive private cars instead of taking public transportation to avoid infection, so that we would see a stronger recovery in gasoline demand.
On the aviation sector, Civil Aviation Administration of China has set to lift the daily flights to 11,000 during the period to reach 73% of the pre-COVID level in 2019. International flights to and from China will climb to 80% of pre-pandemic levels by the end of 2023, according to officials.

Market concern may ease further if the country as a whole doesn’t witness another peak in infections during the Spring Festival travel rush.
In the medium term, another sign that Chinese refiners are set for a material increase in crude oil demand is that China issued a second batch of crude oil import quotas earlier than expected for this year last Monday，raising the total for this year by 20% compared to the same time last year. China may become a major fuel exporter to the European Union once the EU initiates its embargo on Russian fuel imports in February. Initial data from China General Administration of Customs showed that China’s oil product exports rose 139% year on year to hit a 32-month high of around 1.02 million b/d in December 2022. The breakdown data for each product will be released Jan. 20. Given the focus on energy security, we anticipate that Chinese imports will continue to pick up, particularly as refinery runs ramp up and commercial crude oil inventories at Chinese ports remain at a relatively low level.

Markets were also given a lift as US inflation slowed to 6.5% in December, marking the sixth straight monthly deceleration since the mid-2022 peak. The December decrease is largely due to the index for gasoline, which offset other increases. The report was the first inflation report of the new year and the last before the Federal Reserve meets at the end of the month to determine how aggressively it will tackle rising costs. The drop in CPI was seen by analysts as evidence that policymakers could ease back on further rate hikes.
On the supply side, according to the EIA’s latest forecast, world production of petroleum and other liquid fuels will increase by 1.1 million barrels per day (b/d) in 2023 and 1.7 million b/d in 2024. This increase reflects large growth in several non-OPEC countries output that more than offset 1.5 million b/d of declines in Russia’s production over the period.

The largest source of non-OPEC production growth over the forecast period is the United States, which contributes 40% of growth in 2023. U.S. growth is driven by increases in crude oil production in the Lower 48 states. With more global oil production than consumption, EIA expect global oil inventories will increase over the next two years. This is likely to put downward pressure on oil prices.