Can oil prices continue to firm amid renewed supply concerns?

Russia announced that it will decide before March 1 the measures to deal with EU sanctions on Russian oil products, and the situation between Russia and Ukraine has heated up again. On Wednesday (February 8), WTI crude oil closed up 1.15% to an intraday high of US$78.5, recording a three-day rise. This week, the cumulative increase was nearly 9%, the highest since February, and concerns about supply shortages may increase fuel prices Bullish market.

Russian Deputy Prime Minister Novak said that Russia will decide on measures to deal with EU sanctions on Russian oil products before March 1. In fact, with the G7 sanctions on Russian oil and petroleum products coming into effect on February 5, Russia's fiscal budget revenue may be affected. To avoid undue damage to budget revenues from oil tax cuts, Russian President Vladimir Putin last month ordered the government to draft proposals to adjust the tax framework. The main idea is to switch to a model based on Brent crude oil, which features monthly calculations of discounts and freight charges. It should be noted that Russia's move will increase the tax burden on the industry and may prompt companies to start reducing production.

In addition, the market also speculated that Russia will implement a "price floor" to counter the "price ceiling" of the G7 countries. Although Russia's relevant "countermeasures" measures are still uncertain, it is certain that, as a major oil exporter, any reduction in Russia's oil production will increase the risk of global oil supply shortages. OPEC+ announced a production cut of 2 million barrels per day on October 5, 2022, and once Russia cuts production by more than 1-1.5 million barrels per day, a total of over 3 million barrels per day of production cuts is expected to stimulate a sharp rise in oil prices.

Even more worrisome, United Nations Secretary-General Antonio Guterres warned on Monday (February 6) that the war between Russia and Ukraine could further escalate, which could mean the world is headed toward a "more serious crisis". massive war". Russia is highly likely to attempt to restart a major offensive in Ukraine since early January 2023, according to British military intelligence on Tuesday.

China's economic recovery accelerated in the second quarter

 The current rise in oil prices is driven by fears of supply shortages on the one hand, and economic recovery in China, a major oil consumer, on the other hand. As the second quarter approaches, the market generally expects China's economic recovery to accelerate. In fact, the International Monetary Fund, Morgan Stanley, Goldman Sachs, HSBC, JPMorgan Chase and other international institutions have recently raised their forecasts for China's economic growth in 2023. In the update of the "World Economic Outlook Report" released on January 30, the International Monetary Fund (IMF) substantially raised its forecast for China's economic growth this year to 5.2%. economic growth prospects. Specifically, China's manufacturing purchasing managers' index (PMI) rose to 50.1% in January, returning to the expansion range after contracting for three consecutive months; the manufacturing new order index in January hit a new high in 18 months.

Goldman Sachs also said that due to the possible decline in Russian oil exports due to sanctions and the expected recovery of Chinese demand, oil prices will rise from the current around US$80 per barrel to more than US$100 per barrel. What is the impact of Fed officials' collective "hawk release"? Although the improvement of the supply and demand side makes the fundamentals of crude oil tend to be optimistic, the headwind factors of the unexpected tightening of major central banks cannot be completely ignored.

After the unexpectedly strong non-agricultural report (an increase of 517,000) was released last Friday (February 3), a group of officials, including Federal Reserve Chairman Jerome Powell (Jerome Powell), collectively "released the eagle". On Wednesday (February 8), John Williams (John Williams), president of the Federal Reserve's "No. 3" New York Fed, said that it is reasonable for the terminal interest rate to fall between 5% and 5.25%. Keep monetary policy tight enough; 2023 voter Kashkari said most officials expect rates to rise above 5%.

The Fed is still seeking a balance between inflation and the economic outlook, but as the MOVE index, an indicator of U.S. interest rate volatility, has fallen from an eight-month low and strong non-agricultural data, it cannot be ruled out that the Fed will focus more on suppressing inflation. The continuation of the interest rate hike + balance sheet reduction combination will undoubtedly exacerbate concerns about the U.S. economic recession and the liquidity shortage of the U.S. dollar, which is expected to have an impact on global assets including crude oil.

Outlook

 U.S. oil stabilized above $73 twice and showed a counterattack. This level has strong support, and the mid-term bottom has been confirmed again. Oil prices have been in a range for the past two months (73-82 US dollars), and the market outlook is expected to further break through the 80 US dollars mark, and the medium-term target is 82-85 US dollars.