Oil Marginally Rebounds After Hitting 15-Month Low, but Looming Economic Risks Counter China’s Recovery Optimism
Oil snapped a two-week losing streak. The May ’23 WTI contract gained $2.52 on the week to finish at $69.26/Bbl. The ongoing banking crisis caused oil to break out of the $10 trading range it had been stuck in for about three months, driving crude to a 15-month low. However, oil bulls remain optimistic due to China's demand recovery despite concerns about a mounting economic risk.
After Wednesday's 25 basis-point interest rate hike, Fed Chair Jerome Powell cautioned that there might be more tightening in the future and that there won't be any rate cuts this year. He also warned that if the banking industry experiences stress, it could lead to a credit crunch with significant implications for the already slowing U.S. economy.
Russia announced Tuesday that it would maintain its 0.5 MMBbl/d cut in oil production through June 2023. Russian Deputy Prime Minister Novak cited embargoes and attempts to cap Russian oil prices. The cut is in addition to OPEC+'s supply reduction agreement, and ministerial meetings on market conditions are scheduled for April 3.
Additionally, the U.S. may not refill its Strategic Petroleum Reserve (SPR) at the target price range of $67-$70/Bbl this year due to maintenance and mandated crude sales, according to Energy Secretary Jennifer Granholm. The SPR currently holds its lowest level of oil since 1983 at 372 MMBbl.
On balance, AEGIS believes that price risk is skewed to the upside in 2023 due to supply shortfalls and upside demand risks. AEGIS acknowledges that global economic concerns are real and advises a modestly bullish scenario where there is only moderate undersupply but low inventories of oil and products. Furthermore, low OPEC spare capacity could lead to slight scarcity and more leverage on price than usual. This vulnerability makes the market susceptible to upsets in the daily flow of oil supply.
AEGIS hedging recommendations for crude oil remain costless collars for 2023 and 2024. A collar would set a price floor but allow for more upside participation, compared to a swap if prices realize higher. The upside exposure afforded by the structure makes it very popular among our clients in bullish markets.