HFI Research... Oil, it's time to get serious. We've survived 2/3 of Q1 so far and March is going to be a pivotal month for the oil market going forward. Why is it so important?
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China's economic data is coming in and starting to surprise to the upside.
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US oil demand is starting to improve following a material drop into year-end 2022.
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Saudi Aramco is expected to increase its official selling price to Asia on the back of higher demand and tighter physical oil market conditions.
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Russia reducing production by ~500k b/d.
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March physical oil trading will show us how mid-Q2 balances look.
Since the end of 2022, our messaging to readers has been to survive Q1. Oil market balances were going to show builds, and it was a matter of how much we were going to build. In addition, it was also a period in which the market was going to test just how low oil prices will go amidst the builds. So far, we've held the important technical support levels around $73 to $75. Given the balances we are seeing so far, global liquid builds have averaged +0.8 million b/d, or in line with our estimate.
At the moment, we are expecting Q2 balances to show a small draw of 0.29 million b/d, but this assumption does not assume any further production loss from Russia.
Looking at the physical market and the timespreads, it appears the market is also anticipating a small draw. It's not the same type of backwardation we are used to last summer, so we don't expect large draws to take place.
Keep in mind also that product inventories appear to remain bloated in China as indicated by the latest Singapore refining margins. While mobility data continues to improve in China and economic data has surprised to the upside so far, we need product overhang to disappear, product tightness to return, and meaningful backwardation to return.
Why is it time to get serious?
Since June of last year, oil prices have been in a downtrend. For the oil bulls that believe in the structural oil bull thesis, Q1 was an exception, and can only be tolerated if it was just a one-quarter mismatch. And as we stated above, March will show us glimpses of what Q2 looks like. So with Russia reducing production by ~500k b/d and China's data surprising to the upside, if both the physical oil market and the financial side fail to gain traction, then we are awfully wrong in our thesis and assumption. And while it's always easier to use hindsight and look back on where we missed, this is not a mistake we can afford this time around.
So it is time to get serious because everything we had said about the oil market needs to happen, or we are simply wrong.
Let's rehash what needs to happen again:
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The overhang in product inventories needs to go away, and we can tell by improving refining margins.
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Aramco's expected increase in official selling price will show us what happens to the physical oil market in the days to follow, and assuming we are on a path to tighter market conditions, backwardation should improve.
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China's economic data should continue to surprise to the upside on the back of the reopening trade. Copper prices should increase as a reflection of this.
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Finally, US oil inventory data needs to meaningfully turn the other way. US total liquids with SPR are showing a YTD build of 52.449 million bbls. And with the US oil data being the most visible, this influences sentiment the most. So in order for us to be right that oil prices are going higher, US oil data has to start showing bullish draws, or else it's all just a fantasy.
It's time to get serious. If we are right that Q1 was a blip, then everything we laid out should start to show signs of change.