Good morning. Here are the updated risk metrics for  Friday, January 13, 2023.

Markets seem to have settled down after the end of year froth and the consistent messaging from central bankers has removed a great deal of uncertainty. Unfortunately, conditions remain difficult for many businesses and individuals, but there is at least greater certainty for decision-makers about what they will be dealing with in the next few months.

Oil and shipping are creeping up very slightly but any big changes in these prices and commodities generally remain tied to China’s reopening. The effects of dropping zero COVID measures and the approach of the Lunar New Year celebration are slowing these plans but forecasts still point to a big resurgence in Q2 and Q3.

Finally, I’m looking at Russia and Saudi Arabia’s negotiations with China to switch to trading oil in yuan and what the rise of the petroyuan might mean.

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Relative Values (90-Days)

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Trends (21-days)

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Commentary and Evaluation

Brent Crude

Brent Crude is low for this 90-day interval. Prices ended relatively flat over the last 21 days after moderate fluctuation.

What to Watch

Market commentary and analysis vary wildly about what oil will do in 2023 and the broad analysis I shared earlier holds for many: ‘prices will peak around $95 with an average of around $90, a drop from previous 2023 estimates which reflects a gloomy outlook for the year’. 

See Reuters for more

However, within that range, the opportunity for significant movements remains and China’s plans for a great economic boom are leading some to forecast oil moving up as high $110 by Q3. The exact number is less important here than the reinforcement of the idea that China’s reopening will kick in soon and will lead to significant increases in demand for oil as well as other commodities by mid-year.

Iran remains worth watching as their motivation and ability to inflame tension in the Gulf remain. 

Iron and Steel

(No change) Iron and Steel remain very high for this 90-day interval. Prices increased moderately over the last 21 days after moderate fluctuation.

What to watch

The Chinese construction and manufacturing boom that many expected in 2023 is off to a very unsteady start as COVID spreads rapidly after December’s relaxations. Sectors that had struggled under the strict COVID restrictions are suffering just as much in the current laissez-faire environment. This is temporarily delaying the expected economic boom but many analysts expect things to take off in late Q1, meaning that demand for oil, shipping and commodities will all rise significantly thereafter.

See Bloomberg for more

Market Volatility (VIX-US)

(No change) Market Volatility (VIX) is very low for this 90-day interval. The index decreased moderately over the last 21 days after significant fluctuation at the end of 2022.

What to Watch

Messaging from the US Fed and ECB remain consistent and the end-of-year turbulence has faded meaning that, although the news in many sectors isn’t welcome, the general market conditions seem to have been broadly accepted and priced in. Layoffs continue in tech, banking and retail, while some large brick-and-mortar stores, like Bed Bath and Beyond, seem to be slipping further into difficulty. So although decision-makers have greater clarity as to what lies ahead, economic conditions are grim for many and look to remain so for short- to mid-term

Wheat

(No change) Wheat remains low for this 90-day interval. Prices ended relatively flat over the last 21 days after moderate fluctuation.

What to Watch

(No change) Despite agreements brokered by Turkey, Russia could still impose a complete blockade on Ukrainian grain exports to exert pressure on Kyiv and her allies. Meanwhile, even strict controls and inspections for outbound shipments mean that exports remain slowed. Moscow could also conduct military operations to disrupt spring planting meaning that prices could rise again next spring and summer.

Read more in AGWeek.

Ocean Freight (FBX)

Shipping (FBX) remains very low for this 90-day interval. Prices increased moderately over the last 21 days, although they remain well short of the spike we saw in December

What to watch

(No change) China’s reopening and the effects of recessions on demand in the US and elsewhere remain the biggest issues to track but there are no definitive signs to watch at the moment.

Up-to-date shipping data supplied by our partner Freightos

What I'm Watching in 2023

Rise of the petroyuan?

Russia and Saudi Arabia are keen to start selling oil to China in return for yuan instead of dollars. Several high-level discussions took place in 2022 to make the switch from US dollars - ‘petrodollars’, the usual currency for crude - to petroyuan.

This change would particularly benefit Russia, as oil price caps and other financial restrictions are cutting oil revenues in dollars. Switching to sales in yuan would alleviate some of the revenue pressure and open up additional access to foreign capital.

Meanwhile, Riyadh sees this as an opportunity to strengthen ties with Beijing, relations that are of increasing importance to the Gulf states.

What this means for Moscow

Recent reports estimate that Moscow has been losing around $ 170 million in oil revenue per day due to Western price caps. (See Bloomberg for more) The same research forecasts that amount rising to $ 280 million per day in early February when additional sanctions take effect. 

Certainly, Russia would welcome any reduction in financial pressure, but it's unclear how much relief a switch to the yuan will bring about. If it does offset the western price caps, that will extend Russia's ability to fund operations in Ukraine father into 2023, which may change the political and military calculus in both Moscow and Kyiv. However, whether this is sufficient financial relief for Moscow won't be known for some time.

Meanwhile, despite his support for Moscow, it's unclear if President Xi would want to facilitate an expansion of the conflict or prolong it.

What this means for Riyadh

In the case of Saudi Arabia, the move is as much of a signal of independence from Washington as a show of improved ties with Beijing. Riyadh and other Gulf states ignored American requests to support the price caps against Russia and are keen to show their independence from the US. Pursuing multi-lateral relationships makes sense for Riyadh, which has noted that they don't see trade "as a zero-sum game."  

However, American patience isn't unlimited. The relationship with KSA seems increasingly lopsided, meaning that sympathy or support for Riyadh may be in short supply as Mohammed bin Salman court's his new BFF in Beijing. (See Reuters for more)

What this means for Beijing

The yuan is not in a potion to become the world's default currency (more on that shortly), but this would be a win for Beijing and another sign that China was breaking America's traditional dominance. But the more significant benefit will be to bring Saudi Arabia (probably followed quickly by some other Gulf states) and Russia closer to Beijing and increasingly under Chinese influence and control.

What this doesn't mean for the dollar

Whatever the result of any trade arrangements, this does not indicate the death of the dollar as the world's reserve currency. While there may be many who are unhappy with the dollar's prominence, a lot has to happen before another currency can match the flexibility and security of the USD and become a credible alternative. (There's a strong argument as to why the yuan is not ready yet here.)

A few exporters switching to petroyuan, even prominent ones like Russia and KSA, would be part of the multi-decade erosion of the dollar's power, but this change alone will not be fatal.

Overall, the rise of the petroyuan falls into the 'interesting but not important' category in the short term but it does fit with the cyclical nature of power transfer between nations that Ray Dalio has modeled. (Read his excellent book, 'Principles for Dealing with the Changing World Order' for more on this).

However, if the reaction to a switch to petroyuan becomes a broader trend with many other countries dumping the dollar, that may signal that we’re further along this cycle than we (or at least I) thought.

Random Stat

1 year, 59.6%

Chart courtesy of Bloomberg

Year-on-year used car prices in the US have shifted 59.6% in the last year. From a record high of up 46.6% year-on-year last year, prices are now down almost 15% on 2022. This is great news for buyers who no longer have to spend more than the new car sticker price for a ‘gently used’ model. However, this poses significant problems for larger used car retailers like Carvana and CarMax (although I doubt anyone who has been through the wringer at a car dealership will shed many tears over their current hardships). 

This might be the time to hold out and demand they throw in those floormats for free.