Three Keys to Pricing for 2023
February 27, 2023
Written By Adam Buckallew
In the first quarter of 2023, there are still a lot of unknowns about our economy, China and energy inventories. Each of these areas, along with volatility, will impact the direction of prices for the remainder of the year.
There is no shortage of opinions regarding the direction of the U.S. economy. The word “recession” appeared in more than 650,000 news headlines last year. Economists, investors, journalists and politicians have argued whether the U.S. economy was in a recession or headed for one soon. Mixed economic signals have made it difficult to form a consensus. Gross domestic product (GDP) grew at an annualized rate of 2.9% in the fourth quarter of 2022, above the overall GDP growth of 2.1% for the year.
Meanwhile, inflation remains a problem. The Consumer Price Index (CPI) for December showed a 6.5% rise in prices over the last year—a 0.1% dip from November. While that represents a welcome retreat from the 9.1% peak of the current inflation cycle, the December reading marks the second-hottest December CPI data since 1981. Interest rates are likely to continue to rise, which may cause consumers and businesses to put off purchases. Many market observers speculate that U.S. economic growth will slow in 2023 under the cumulative weight of interest rate hikes instituted by the Federal Reserve.
China Loosens Restrictions
China’s economy was hampered by its ultra-strict zero-COVID policy in 2022, but the country may be positioned for a bounce back. Chinese President Xi Jinping’s administration loosened travel restrictions in December and reopened the country’s borders to visitors. The uptick in travel has created additional demand for all forms of energy.
There is a lot of pent-up demand in China and any economic rebound could be big. China has roughly 1.6 billion people. More activity—be it driving to work, riding the subway, going out to eat or traveling—could create a massive economic ripple effect. This is what energy market analysts fear. As Chinese citizens travel more, demand for energy and support for pricing would grow. Of course, a more open policy could also result in a resurgence of COVID-related issues, which has been the primary stumbling block for the Chinese economy in recent years.
Oil inventories have begun to catch up with historic stockpile percentages but remain at concerning levels. Distillate inventories have risen by 14 million barrels since Oct. 7, which marked the lowest level in the last 10 years. The deficit on Oct. 7 compared to the five-year seasonal average has been roughly halved as of Feb. 3, 2023. This is great news, but stocks remain at the lower end of the 10-year average range. We are unlikely to see distillate inventories restored to a comfortable level without a recession or an economic slowdown to ease consumption. If a recession does not disrupt demand, prices will likely move higher to slow consumption and preserve inventories.
Wild cards, such as Russian President Vladimir Putin, could create additional uncertainty in the energy market. Ukraine and Russia remain at war. Many countries have sanctioned Russia, and the European Union has set price caps on Russian refined oil products to limit Moscow’s funds for its Ukrainian invasion. What that means for Russia’s oil production and the barrels it provides to the market remains to be seen.
In January, Department of Energy reports showed a massive build of 18.96 million barrels of crude oil above expectation due to a cold snap that caused many refineries to shut down or scale back production. Despite this news, we are still looking at below-average crude inventories for February. Gasoline and distillates stocks also remain at the low end of their historical averages for this time of year.
These factors—the economy, China’s loosening of restrictions and the inventory situation—will be key to what we see from the energy market. Staying informed on these news topics can help you anticipate energy market trends and the pricing we may see in 2023.