Crude cautiously higher after two-day rout wipes out 9%

Quantum Commodity Intelligence – Crude oil futures Thursday were cautiously higher as markets rebounded following the rout that wiped more than 9% from crude benchmarks in the first two days of the new year.

March ICE Brent futures were trading at $78.75/b (1600 GMT), compared to the day's high of $79.97/b and Wednesday's settle of $77.84/b.

At the same time Feb23 NYMEX WTI was trading $73.89/b, versus the day's high of $74.92/b and Wednesday's settle of $72.84/b.  

Dire warnings, led by the IMF, over a major slowdown in the global economy set the tone for 2023 trading, with Brent prices dropping around $8/b in the first two sessions of January.

But prices rebounded from the sharp losses as some analysts suggested the recessionary warnings had been overdone.  

Mark Zandi, chief economist at Moody's Analytics, thinks the US economy will hit a rough patch but avoid a recession, thanks in part to the savings Americans have built up since the beginning of the pandemic.

"There is no doubt the economy will struggle in the coming year as the Fed works to rein in the high inflation, but the baseline outlook holds that the Fed will be able to accomplish this without precipitating a recession," Zandi said in the note.

Prices were also lifted after Colonial Pipeline Co. halted operations on a line suppling fuel to the US Northeast, which pipes distillates and gasoline to the New York Harbor market.

US crude stocks built by nearly 1.7 million barrels last week according to latest EIA figures after a number of refineries were taken offline following Storm Elliot, although the figure was below the 3.3 million barrels reported by the API late Wednesday. The build in commercial stocks was also offset by the 2.7 million barrel drop in SPR crude

Meanwhile, Saudi Aramco cut its Official Selling Prices for February-loading crude to Asia, which although largely in line with expectations was viewed as bearish by some analysts.

Outlook

UBS joined fellow investment bank Commerzbank in forecasting oil prices to rise above $100/b during the coming months, with ICE Brent crude futures trading at $110/b in mid-2023 and the end of 2023, while predicting NYMEX WTI at $107/b over the same period.

"We expect crude oil prices to rise in 2023 for several reasons. With China reopening, oil demand looks set to exceed 2019 levels and hit a record high in 2H 2023," said the report, adding emerging Asia, including India, should return to driving oil demand growth this year.

But also weighing on markets this week, European natural gas prices traded below €65/MWh for the first time in more than a year as exceptionally mild winter temperatures across the continent continued to crush demand and preserve inventories.

Temperatures for January have reached an all-time high in a number of nations across Europe.

Middle distillates have also come under pressure as higher Chinese exports should help compensate for the loss of Russian supply at the of the month, while the mild northern hemisphere winter reduced the need for gas-to-oil switching.

Diesel refining margins have dropped to three-week lows at around $40/b above ICE Brent this week for ULSD cargoes in northwest Europe and dropped below $30/b in Singapore on 10ppm cargoes.

Cracks have shed around $5/b in Asia and Europe since the end of last year following reports that China's first product export quotas for this year were sharply higher than the last batch.