Here's what Citi's global energy expert Ed Morse has to say about oil markets, Russia, and the 'stunning change' that's washed over the American oil market.
Happy Saturday, readers. I'm senior reporter Phil Rosen.
Today's newsletter features my conversation with Citi's Ed Morse, one of the top energy economists and oil-market forecasters in the business.
In a wide-ranging conversation, he breaks down Russia and the US, crude prices, and more.
Then, I've got a full slate of weekend reads just for you, from across Insider's Pulitzer prize-winning newsroom.
Ed Morse is the global head of commodity research at Citi Group. This conversation has been lightly edited for length and clarity.
Phil Rosen: What will energy markets look like in 2023, and what's your oil price forecast?
Ed Morse: We have an average price for Brent at the end of the year at $76 a barrel. We have WTI ending the year under $70 a barrel. Overall, there will be more market weakness.
It'll be another volatile year, but not quite as volatile as 2022. There will be major uncertainty around what we call the "fragile five" producers: Iran, Iraq, Nigeria, Libya, and Venezuela. And, Russian supply is less certain than in the past.
We have an underlying view that we will see an imbalance between supply and demand across 2023, with significantly more supply coming into the market than demand, leading to inventory builds, which should weigh on prices so that we see prices ending the year on average lower than the beginning.
How has Russia's role in energy markets changed since it invaded Ukraine?
EM: There's been a critical build up in anti-Russian sentiment in Europe, and a rethinking of that relationship, that Europe is overly dependent on Russian supplies. So we had companies — even before governments got involved — saying they were not going to import Russian oil and gas.
The surge in Brent from around $85 to $125 a barrel earlier this year was not a function of supply versus demand, but a function of large distortions in the market in which the readily available supply from a close source was being shunned.
How has the US's role changed in global energy markets this year?
EM: There was a stunning impact on American oil. The US started the year as a 7-million-barrel-a-day exporter of crude products. As the year is ending, our exports have been averaging closer to 10 million barrels a day, and at times close to 11 million. The US supply system has played a really significant role in filling the gaps.
And Wednesday data showed the US was exporting 1.483 million barrels a day of diesel — in other words, there's been a 91.8% increase in US exports in diesel. So US refineries are running all out, we're exporting a hell of a lot.
What impact have the West's sanctions had on Russia and markets?
EM: The impact of December 5 sanctions was not nearly as great as the impact of the shunning of Russian oil at the beginning of the year.
But there's clear evidence that sanctions are having a punitive impact on Russia's natural gas. The argument had been that the actions had not punished Russia, and that the price of oil had gone up, and Russia was receiving more revenue than it otherwise would have. But it turned out that the drop in revenue from natural gas exports being lost to Europe had no replacement whatsoever because there was no other place to sell the gas to, so revenue from gas exports plummeted.
By August, Russians felt the impact of less revenue on the natural-gas side. That's as quasi-permanent as anything can be for Russian revenue, and their plans had been to expand Russia's position in the natural gas market, not to contract it. They will never be able to replace the lost supply going to Europe. Russia simply doesn't have the technology or the ability to penetrate markets, given the reputational risk.
And on the oil side, the lower prices go, as long as there's a discount on Russian crude, they get punished for it, all else equal.
Should energy markets be concerned about the February sanctions on refined Russian fuels?
EM: Energy markets have been very concerned about it, but their concern is slowing. The diesel market's been exceptionally tight, and the big gap in Europe's supply has been in diesel, where they have turned to Russia for most supply.
But now it's the case that diesel has become more abundant.
China is exporting diesel again, and may be exporting a record amount of it by the time we get to the first quarter of 2023. Supply has been building in Europe, with refineries making more diesel on their own. There's more refining capacity available in the world, with Kuwait and Saudi Arabia increasing refining capacity.
But the major, astonishing element really is the US, as I said earlier.
Here's what else to read this weekend:
1. Google founders Larry Page and Sergey Brin have had lavish, colorful lives since they left the company. Private islands, flying cars, and psychedelic parties are just part of the story. Dig into the wild, post-Google endeavors of the two visionaries.
2. Tech has endured massive layoffs and a broad downturn. And yet, most laid-off staffers are finding new jobs within three months, and many are even scoring raises. There's been a surprising silver lining to the massive job cuts.
3. YouTuber Ali Abdaal makes productivity videos for his 3.6 million subscribers. Since leaving medicine in 2020 to pursue content-creation, he's diversified his income streams with online courses, selling physical products, and a book. His company generated $3.6 million last year — here's how much he's making in 2022.
4. Netflix ushered in a grand streaming revolution. We now have dozens of streaming apps, hundreds of new shows, and thousands of movies at our fingertips. So why does it feel like there's nothing to watch?
5. Private equity firms are hunting for tech companies to back amid a broad slashing of valuations — and according to bankers and private data, these are the 34 names that are most likely to be on their holiday shopping lists.
Edited by Max Adams (@maxradams) in New York.
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