MNI Commodity Weekly: China Forefront of 2023 Crude Price Outlooks

Executive summary:

• China Forefront of Crude Price Outlooks: Banks focus on return of Chinese demand as key driver of crude prices in 2023 as oil demand faces recessionary pressures in other key markets this year.
• Chinese Q4 Crude Imports Signal Demand Return: Initial indicators suggest Chinese oil product demand is set to rise but speed of full return remains unclear.
• Oil Markets: Crude rallies on China demand optimism while tighter diesel and gasoline supplies expected after the EU ban on Russian products next month.
• Gas Markets: High storage levels and stable supplies are limiting the impact of cold weather on gas prices with upside risk from Asian demand.

Supply Side Views: China Forefront of Crude Price Outlooks

Oil markets face further volatility through 2023 as major banks try to weigh up a range of key factors in their pricing outlooks for the year. The overriding theme and key driver to the upside is undoubtedly China’s reopening which has fueled bank forecasts towards a bullish outlook. On the supply side, bank forecasts have warned of Russian barrels falling off the market due to Western sanctions while struggling to place the same quantities into the Asian market – it’s only real remaining outlet. Discounted Russian barrels to China now also find themselves in increased competition with those from Iran.

• Goldman Sachs said in a note carried by The National that they expected oil prices back above $100/bbl this year and Brent could trade at $105/bbl by the fourth quarter backed by large Chinese import quotas signaling its economy is set for a rebound once covid wanes.
• The Goldman price outlook also factors in expectations that OPEC+ would unwind production cuts into the second half of the year, helping to shore up global crude supply.
• In mid-December, Goldman said that supply shortages and insufficient investment in new supply would result in a bumper year for commodities in 2023.
• Morgan Stanley forecasts oil market supply will tighten Q3/Q4 of 2023 in a client note last week, supported by a Chinese recovery. It forecasts Brent to remain rangebound between $80-85/bbl Q1 but reaching $110/bbl by year end. It pegs China’s re-opening at an extra 1mn bpd crude demand – the same as Goldman while adding that Russian sanctions could pull another 1mn bpd off the market.
• JP Morgan cautioned a “bumpy” return of demand from China last week but forecast it would help a Brent recovery to $100-120/bbl over the second half of this year.
• Barclays were more reserved in their price outlook, forecasting a Brent price of $98/bbl for 2023, leaning more towards the bearish side of a global demand slowdown.

Chinese Q4 Crude Imports Signal Demand Return:

As the shining light for commodity demand expectations in 2023, Chinese customs figures out last week show an overall slowing picture for crude imports in 2022 versus the year prior but optimism is focused on the Q4 ramp up as China U-turned on its zero covid strategy.

• Crude imports for the full year by the world's top buyer reached 508.28 million tonnes, equivalent to 10.17mn bpd, 0.9% lower than in 2021.
• However, refiners took in 4% more crude oil from a year earlier at 48.07 million tonnes in December, about 11.3 million bpd - the third highest in 2022.
• A range of demand indicators from flight activity, subway travel numbers and traffic congestion this week all suggest that China is staging an oil product recovery.
• A ramp up in refining is not all being directed for domestic consumption with current quotas allowing Chinese refiners to offload excess product into the export market while the recovery is still in its early stages.
• Figures from vessel tracking firms show that China is leaning towards sanctioned barrels, allowing refiners to make better returns against a slowing Asian market. China emerged as a key outlet for sanctioned Russian barrels last year but December marked the highest monthly import rate of Iranian crude on record according to Vortexa as Russia finds competition against its heavily discounted Urals.

Oil Markets:

After starting the year with no clear direction, crude has rallied on the back of renewed optimism for Chinese oil demand as the country recovers from covid and is boosted by recent better than expected economic data.

• Near term global economic growth and weak oil demand concerns continue to weigh on prices and are limiting any upside moves. Weak near term demand is keeping the prompt time spreads in contango with data suggesting below normal demand in the US and China.
• The remainder of the crude curve is strongly backwardated with hope for a recovery in China and the global economy in the second half of the year. Concern for oil supplies following the EU ban on Russian oil products from 5 Feb adds to market support.
• The impact of the EU ban on Russian seaborne crude is not yet clear with data this week suggesting supplies are finding alternative buyers away from Europe. The upcoming EU ban is also supporting gasoline crack spreads with concern for naphtha and VGO blending supplies. Diesel upside moves have been more muted with Europe increasing supplies from the Middle East, US and China while maintaining high Russian supplies to boost inventories ahead of the ban.

Gas Markets:

• The market remains sensitive to cold weather and LNG supply risks with the potential for higher Asian demand. A recovery in Chinese LNG demand could put pressure on European prices with LNG supplies pulled away from Europe to Asia. Gas spreads favour spot cargo diversions to Asia but weak demand from the region and high inventories have limited the draw away from Europe so far this year.
• US gas prices have rallied with the arrival of cold weather across the country later this month. Low demand, high production and limited LNG export capacity had pushed front month prices down to the lowest since June 2021 earlier this week. The return of Freeport LNG from the outage following a fire in June could add to upside support. The terminal restart has been delayed several times but was last month reported to be aiming for an end of Jan resumption, though news reports suggest this could now be February.

Gas in Storage Europe

Source: GIE AGSI

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