Jan 2 / Victor Arduin

Energy Weekly Report - 2024 01 02

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"Another important demand driver for oil consumption is the United States. Here, things are looking better, but there are still uncertainties."

The new year may bring potential bullish environment for the energy complex

  • The last week of 2023 recorded another loss for oil, with WTI falling more than 2%.
  • Demand data does not boost market confidence, with significant uncertainty coming from the United States and economic disappointment in China.
  • Nevertheless, 2024 could be a more bullish year, especially with the prospect of a less restrictive interest rate environment than the past year.

Introduction

The last week of the year reflects concerns about the energy sector, where fundamentals continue to raise worries due to decelerating demand, and signs of reduced cooperation among OPEC+ member countries, which could result in increased oil supply in the future. However, there are some bullish signals, which brings a prospect of correction for the main oil benchmarks in the near future.

China's crude oil consumption was below expectations in 2023

First, let's check some of the key events that have fueled this bearish sentiment for oil, which has seen significant declines in its prices since late October.

One of the major drivers of demand is China, the Asian giant and the world's largest oil importer. It was believed that the reopening of its economy this year would boost oil consumption. Indeed, the country's imports grew significantly by 12.1% in the first 11 months of the year. However, the International Energy Agency (IEA) predicted a 1.8 million bpd increase for the country, till in November, China recorded an increase of only 1.21 million bpd, below expectations.

The macroeconomic situation in China demands careful attention, although the economic issues are sometimes exaggerated by the media. There is an ongoing structural change in the country that is currently significantly impacting the real estate sector, one of the most important sectors of the economy. Additionally, deflation in the country brings insecurity for investors and consumers. Therefore, with the economy growing at a slower pace, energy consumption has also experienced slower growth.


Image 1: China - Crude Oil Imports (Millions bpd) & Growth YoY (%) 

Source: Bloomberg

Gasoline consumption is rising in the United States

Another important demand driver for oil consumption is the United States. Here, things are looking better, but there are still uncertainties. Oil production in the country is expected to be the highest in its history, totaling 13.1 million barrels per day in the last quarter of this year. Looking at the consumption of refined products in the country, demand for middle distillates has been lower than expected, but is being partially offset by a rapid increase in gasoline consumption.

This is explained, in part, by the strong resilience of the labor market, which bolsters gasoline consumption, while high-interest rates have posed more obstacles to the industrial sector, the primary consumer of diesel. However, the overall outlook is not as bad as it seems. It's important to notice, though, that the post-pandemic recovery of the country's oil consumption has been at a slow pace.

Image 2: US - Gasoline Demand (millions bpd) 

Source: Reuters

Concerns arise regarding the supply side of crude oil

Looking over the supply, where traders have generally placed more hopes for bullish news, the scenario has been more uncertain. The Israel-Hamas conflict has added a strong element of volatility, with war developments often triggering supply disruption risks.
The most recent of these triggers were the attacks by the Houthi militia on oil tankers in the Red Sea, apparently to harm shipments associated with Israel, but which often resulted in attacks on various ships unrelated to the conflict, supporting prices.

Another market expectation would be coordinated actions from OPEC+, but the recent departure of Angola exposed the group's fragility, with some members no longer seeing the effectiveness of the strategy to restrict oil supply. In practice, this has resulted in more market share being captured by other countries that are rapidly increasing their production, such as the United States, Canada, and Brazil.

In Summary

After summarizing some of the main events that are reflecting oil prices, the overall trend has been downward. One example of this is the 50-day moving average crossing below the 200-day moving average. WTI closed with a decline of approximately 10% in 2023, the first decrease since the pandemic.

Image 3: WTI Prices (USD/bbl) 

Source: Reuters

However, there are some potential factors that should be considered looking ahead. The new year is likely to be much less interest rates than in 2023, which could result in higher demand for energy. Additionally, the US and Europe have been able to avoid a recession, one of the significant risks for the energy complex last year.

Furthermore, gasoline demand in the world's largest economy has remained resilient and could drive prices in the upcoming driving season, even with more crude oil coming from the supply side. Therefore, after the bearish sentiment that ended 2023, the new year may usher in a bull market for energy commodities.

Weekly Report — Energy

Written by Victor Arduin
[email protected]
Reviewed by Natalia Gandolphi
[email protected]
www.hedgepointglobal.com

Disclaimer

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