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Oil Update—January 2023

I am forecasting that West Texas Intermediate (WTI) oil will range between $70 to $90 per barrel during February. Oil closed near $80 on Friday, January 27, 2023.

As everyone is aware, China’s reopening continues. Josh Young on Twitter has been chronicling the rise in flights in China. As you can see from the picture from his thread below, flight count may have bottomed, and that may be indicative of China’s economy.

Even though flight activity looks healthy, we should continue to monitor China’s reopening to confirm that it remains healthy.

Many, perhaps even most, expected global economies, especially European economies, to be much weaker than they appear today. On January 22, however, the Financial Times wrote about the change in sentiment in “Eurozone set to avoid recession this year as economists’ gloom lifts” (subscription required).

The eurozone will avoid a recession this year, according to a widely-watched survey of economists, which illustrates the sharp about-turn in global economic sentiment in the past couple of weeks.

As recently as last month, analysts surveyed by Consensus Economics were predicting the bloc would plunge into recession this year. But this month’s survey found that they now expect it to log growth of 0.1 per cent over the course of 2023. This is thanks to lower energy prices, bumper government support and the earlier-than-anticipated reopening of the Chinese economy, which is set to boost global demand.

The upgrade comes after officials and business leaders at this week’s annual World Economic Forum in Davos also embraced a more upbeat outlook, and the IMF signalled that it would soon upgrade its forecasts for global growth.

Early in the new year, however, oil tends to be somewhat soft. Northern countries are tapering their oil purchases for heating, refinery maintenance season is beginning, and the summer driving season has not yet begun.

The Fed does not appear to be a concern. According to the CME FedWatch Tool, there is a 98.4 percent probability that the Fed hikes by 25 basis points, or 0.25 percent, to a target range 450-475 bps.

The stock market has been stronger than I expected, with a 6.1 percent return as of last Friday. If there are any blips in the markets, oil may fall toward $70. When there is a strong risk-off period, oil tends to fall with other asset classes. Otherwise, I expect oil to hover around $80 or a bit higher.

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