Oil prices are showing underlying strength to start the new year but are still fighting the Federal Reserve headwinds and the renewed strength in the US dollar, states Phil Flynn of PRICE Futures Group.

Oil prices seemed unphased by the New Year greeting by the International Monetary Fund (IMF) which is predicting that a third of the global economy will be in recession in 2023. Happy New Year from the IMF.  Perhaps oil is ignoring it because of signs that demand in China is rising despite reports of Covid cases spreading throughout the country.

Bloomberg News reports that “nearly a dozen major Chinese cities are reporting a recovery in subway use, a sign that an ‘exit wave’ of Covid infections may have peaked in some urban areas. More and more people are taking the subway in 11 of China’s biggest cities, with Shanghai, Guangzhou, Shenzhen, and Nanjing among the latest metropolises to report a rebound in trips over the last week. This comes after places such as Beijing, Zhengzhou, and Chongqing, which had already seen subway usage and traffic congestion increase from a trough reached around mid-December according to Bloomberg.

China is so confident in the reopening that on January 3, 2023, they raised the cost of domestic gasoline and diesel prices. They will increase by 250 yuan for gas and 240 yuan per ton for diesel.

Warm weather is saving Europe and killing natural gas prices in the US. The polar plunge has reversed and now it looks like spring has sprung.   Vince Bryan and Bam WX reported that their official January Heating Degree Days (HDD) forecast puts us in the top 10 lowest (warmest) over the past 70 years. He said that widespread US warmth in the first 10 days of Jan will pave the way for below avg heating demand.   Watching the end of the month for a potential cool down.

In Europe, Oil Price dot com reported that a warmer-than-usual start to the winter in Europe and Asia and forecasts of mild weather in the United States following the Christmas winter storm has eased concerns about natural gas shortages at the start of 2023. Natural gas prices in Europe dropped on the first trading day of the year to their lowest level since February 21, 2022, days before the Russian invasion of Ukraine, which upended energy markets and sent gas prices skyrocketing. Mild winter weather in many parts of Europe, rising wind power generation, and lower electricity consumption started dragging European natural gas and power prices lower last week.    Weather in most of Europe has been unusually warm since the middle of December, and forecasts point to continued mild weather for another two weeks. As a result, gas demand is lower and storage levels remain at comfortable levels. Across the EU, gas storage sites were 83.5% full as of January 1, with German storage at over 90%, according to data from Gas Infrastructure Europe. Demand destruction in the industry also helps ease the upward pressure on gas prices in Europe.

The Wall Street Journal in a must-read is reporting that “The globe is shrinking for Exxon Mobil Corp. XOM 1.01%increase; green up pointing triangle and Chevron Corp. CVX 0.66%increase; green up pointing triangle as the two largest U.S. oil companies pull back on big international oil projects and concentrate on a handful of more lucrative assets closer to home. The two fossil-fuel giants plan to spend most of their annual budgets in the Americas this year, with Chevron saying it will pour 70% of the capital allocated for production into oil fields in the U.S., Argentina, and Canada, and Exxon saying it will spend a similar portion of its budget in the Permian Basin of New Mexico and West Texas, Guyana, Brazil, and liquefied natural gas projects. Their focus on the Western Hemisphere is expected to continue for years as they give priority to growing shareholder returns and cutting costly frontier drilling projects. Their retreat from places such as southeast Asia, West Africa, Russia, and parts of Latin America—sometimes by choice, sometimes by fiat—marks an era of retrenchment for companies that had spent decades putting stakes in the ground around the world.

My take is that China’s reopening will add to oil demand, and it will gain momentum as the year goes on. Seasonally and fundamentally, we should be buying breaks even as recession fears mount. China’s demand growth should offset the recession demand impact. This could be a big year for oil.

Gas prices look like they have bottomed. With SPR Releases coming to an end we expect that gas prices could surge.

Oil stocks have had a great year yet should you dump stocks after the worst year since 2008? Market Watch reports that “Julian Emanuel, strategist, at Evercore ISI, reckoned that such concerns don’t necessarily mean stocks can’t rally. “there is a long history of earnings down/stocks up years (1970, 1982, and 1985 stand out, but there is also the tendency for strong stock/bond return years to follow historically forceful tightening cycles (1982, 1985), particularly in years (1995) following ‘havoc being wreaked’ on a 60/40 portfolio such as 2022’s declines,” Emanuel added according to MarketWatch.

Natural Gas is getting hit by the warm weather. EBW Analytics reports that natural gas continues to be pummeled as production freeze-offs recover fully, the January weather outlook continues to melt down, and NYMEX winter risk premiums are no longer necessary. The first week of January may feature a minuscule weekly draw under 20 Bcf. After a wave of continuous selling pressure, the near-term outlook could be subject to a notable relief rally and the weather could flip at any point. The seasonal outlook for natural gas, though, is firmly bearish—and it would not be surprising to see March under $3.50/MMBtu/

Learn more about Phil Flynn by visiting Price Futures Group.