OIL TRADERS ARE SKATING ON THIN ICE

Given how benchmark crude prices have tumbled recently, jitters in the oil market will run high for a while longer.

 West Texas Intermediate (WTI) crude is hovering around US$65-70/bbl, compared to $80 at the beginning of the month. 

The anatomy of the sell-off

The sudden drop, sparked by the dramatic events involving Silicon Valley Bank and Credit Suisse, has unsurprisingly led to a reassessment of recession risks and the potential impact on global oil demand. It is forcing bulls to run for cover and producers to hedge against the downside price risk.

If the price of crude oil is going to recover, it looks like it will have to take place in the second half of the year. 

 The International Energy Agency's flagship monthly Oil Market Report confirmed the bull's worst fears that markets will remain in surplus by recently highlighting that "global oil supply is outstripping still lacklustre demand". This has resulted in global crude stocks reaching their highest levels since 2021Q3.

Nonetheless, prospects for a second-half price recovery remain fuzzy as much will depend on China's reopening and OPEC+'s production strategy.

China is challenging to figure out as the mobility data is excellent, and recovery is well underway. Still, broader cross-asset sentiment remains sour due to the unemployment rate, particularly among young people

It's also challenging to imagine OPEC+ simply standing pat if the expected pickup in global oil demand falters and prices slide further. Knowing that substitutes in an energy-constrained world are few and far between, meaning that the "OPEC put" is very much intact.

While Riyadh is in wait-and-see mode until it obtains greater clarity on the impact of Western sanctions and whether an OECD recession looks imminent, Oil traders sold right through Russia's 500 kb/d production cut. 

If you follow my Oil commentary, you know we painted the tape green below Brent $74 on Friday, so we do not think it is time to hit the panic button yet. Still, barrel by barrel, tick by tick, it’s becoming more obvious that energy traders will likely be skating on thin ice for the rest of the year. 

Expect more price downgrades. On Feb 10, we pegged Brent to end Q1 at $78 ( -$ 12 to consensus) and to recover to $82 in Q2. So we will likely revise our Q2 price lower next week also.

PRE ASIA OPEN: WHEN MOVING AT WARP SPEED