OIL tweet 🧵. Net long speculative positioning in oil (crude+products, options delta+futures) is fast approaching the lowest since this data exist (2011). The managed money category in the COT (representing hedge funds) sold about 400mil bls in the last 6 weeks.
What drives this selling? 1/7 Hard to identify a clear reason. There have been macroeconomic worries for a while now. But demand growth has actually consistently been revised up during the year, and mobility data shows an acceleration in demand and demand growth. Nevertheless, the physical market (represented by crude physical differentials and refining margins) has weakened considerably from very strong levels since late September 2/7

Now what about 2023 predictions?
I would say that most of the supply surge is behind us, and the demand surge is ahead of us, meaning much higher prices sometime this year.
A complete China/Asia reopening would likely bring around 4mbd of extra demand 1/4 at some point in 2023. This is about 3 times more demand growth than expected in the market (which is overly focused on this big upcoming recession...)
How 4mbd? Basically 4.6-4.8mbd to reconnect to pre 2019 linear demand trend, minus 5-600kbd gasoline substitution to EVs. 2/4

Thoughts on the path of oil prices in 2022:
In 1h2022, oil prices went up due to supply not growing, no more OPEC spare capacity, and worries about Russian oil export disruptions
In 2h2022, oil prices went down mainly due to a surge in supply from various countries 1/5 (close to 3.5mbd over 3-4 months) and SPR releases (1mbd+). The demand weakness came mainly from Russia and Ukraine - where demand dropped 600kbd between 2h and q1 - and from China due to rolling lockdowns. Macroeconomic worries, the Fed raising rates, and 2/5

What would a full China reopening mean for world oil demand growth?
Sometimes, I feel like it is important to zoom out in order to see the forest from the trees. Starting with a chart on oil demand since 1983, we can see that it has closely followed a trend line 1/6 ever since. In periods of recessions, oil demand would be below trend for a year or 2, and then meet the trend again. After being below trend in 2008 and 2009, oil demand went back to trend in 2010, as if no great recession happened. Could it do the same again? 2/6

1/4 A few numbers for people who think that the west has done too much for Ukraine:
Pentagon budget $1 trillion/year
Federal debt $31 trillion
Cost of interest on debt at 5%: $1.5 trillion/year
US help to Ukraine: $20bil
Cost of war in Afghanistan: $2.3 trillion over 20 years 2/4 to leave it even worse than before.
Now there is an opportunity to not only help the heroic Ukrainians who are fighting for their lives and freedom, but also to stop the evil Russian empire from being able to do evil things again in the future.

A few high level thoughts about how Europe can deal without Russian gas for the next 2-3 years:
Russian natural gas supply to Europe was responsible for 30% of European demand in 2021 (103bcma vs 342).
Half of that is replaced by LNG imports (from 51 to 101bcma 2021-2023) 1/6 Assuming zero Russian gas for years and that Europe keeps importing the same amounts of LNG than since early 2022, we need to reduce demand by 15% overall to balance the market. So far industrial demand is down 30% due to a mix of closures and switching to oil. 2/6

This is the first article I read this year mentioning nuclear winter, something we know since the 1980s. No politicians spoke about it this year, which I found surprising. Hopefully they know about it bloomberg.com/news/articles/… en.m.wikipedia.org/wiki/Nuclear_w…

For the people worried about the impact of a recession on oil demand and oil prices:
1) average annual oil demand growth from 2000 to 2010, and 2010 to 2019 is quite steady around 1.2-1.3mbd. In line with population growth over time (1.1-1.2%) (2016-2019 1.37mbd) 1/4 2) Due to covid-related lockdowns, demand has been way below trend over the last few years. Taking 2019 as a base, and making demand grow at 1.2mbd/year, we should be at 104.2mbd of demand for 2022. But latest estimate is 99.2. So 5mbd below trend already. 2/4

A few thoughts on price caps on Russian oil. The two reasons why Russian oil prices should follow international prices are 1) if the barrels compete freely on the market, and 2) for Russian oil production to follow global supply and demand balances. 1/5 But if Russian oil production will go down over time regardless of supply and demand balances because of sanctions related to Russian’s actions over Ukraine, and if there are caps on the amount that can be purchased by countries (through logistical issues or sanctions), then 2/5

So far the Russian invasion of Ukraine has brought MORE oil to the market. The amount released by strategic reserves around the world is more than russian export or production losses. 1/5 Seasonally in average global demand goes up 3mbd between 1h and 2h of year. We had Chinese lockdowns in the weaker period of the year, and despite that we have very tight physical markets for both refined products and crude 2/5

A few thoughts on possible oil sanctions on Russia. 1) an easy solution would be to put a 100% tax on Russian oil imported by European countries. That way those who can will buy alternative barrels, or bid Russian oil at 50% discount. Some would go to China/India but they 1/ would bid 45% discount. The countries like Germany that made themselves very dependent on Russian oil would end up paying more, and it is only fair to pay for past mistakes instead of keeping Europe hostage. There would probably still be a shortfall, but that could 2/

Imagine a world where autocratic countries trade only with each other. Russia, Saudi, Iran would basically only sell oil to China+, but China+ would need a lot less oil because they would not have the EU and US as export markets. So there would be 20mbd to be sold for 10mbd of 1/ import demand maximum, leading to prices crashing, in Yuan, and leading to all those economies collapsing. There is no creativity under autocratic regimes, so what else would they do? Pretty much nothing. They all despise the west, but could not live without it. 2/

A few thoughts on the OPEC++ meeting. Great effort from all parties so far, at least on paper. Now what does that mean for oil prices? We are still likely to reach tank top late April/early May. But inventories are likely to then draw from June onwards and reach today’s levels 1) in about 1 year. Is it good news for oil prices relative to the alternative of no deal or much smaller cuts? I am not so sure. Large production cuts would have happened through shut ins from May onwards anyway due to the lack of demand and storage availability. 2)