Okay, class, which country will exert the greatest effect on crude oil prices, and hence inflation, in 2023?

(Bueller? Bueller? Bueller?)

No, it’s not Russia. Nor any other member of OPEC Plus. The answer is China.

China, the world’s second-largest economy, also is the world’s second-largest importer of crude oil (after the European Union). Now that Beijing has jettisoned its deeply unpopular COVID restriction policies, the country’s economy is starting to hum again.

Manufacturing data released this week by the National Bureau of Statistics of China pointed to a robust economic rebound in February in that country.

China’s Purchasing Managers’ Index (PMI) last month rose to 51.6 from January’s 49.2, the fastest rate of growth since April 2012 when the reading reached 53.5. Any reading above 50 denotes economic expansion.

The upshot: Crude oil prices, and concomitantly inflation, are receiving upward pressures from China’s revival. The country’s year-over-year gross domestic product growth is expected to hit 5% this year, compared to 2.9% for the globe and 1.4% for the U.S.

That said, the main U.S. stock market indices closed higher Thursday, as follows:

• DJIA: +1.05%
• S&P 500: +0.76%
• NASDAQ: +0.73%
• Russell 2000: +0.22%

The S&P 500 continues to hover above its 200-day moving average, and the CBOE Volatility Index (VIX) has dipped below 20. Those are two bullish trends.

Investors are looking past inflation and rising Treasury yields to focus on corporate earnings. Q4 earnings as a whole have been sub-par, but in recent days they’ve come in better-than-expected for certain bellwethers.

Notably, after the closing bell Wednesday, Dow component Salesforce (NYSE: CRM) posted a massive fourth-quarter earnings beat and offered strong guidance.

The inflation-wary Fed might rain on Wall Street’s parade at its next meeting March 21-22, but that’s about three weeks away. In the meantime, investors seem intent to shove rate hike worries to the backburner.

Bad omens…

The price of U.S. benchmark West Texas Intermediate (WTI) currently hovers at about $78/bbl (see the following chart, which depicts the price over the past 12 months).

Source: U.S. Energy Information Administration

Analysts at Goldman Sachs (NYSE: GS) on February 27 asserted that the next 12-18 months are likely to witness a surge in oil prices, bringing prices above $100 per barrel.

These are bad omens for the fight against inflation. In the words of a recent report from the International Monetary Fund:

“…higher oil prices seep into the cost of living and wages. Filling the gas tank soon starts to cost more when crude prices climb, as does airfare, but higher energy costs also boost prices for all the products on store shelves. Workers seek higher wages to compensate for a loss in their purchasing power…If this feedback is large and sustained, a wage-price spiral could emerge, with wage growth and inflation rising over an extended period.”

Higher oil prices in 2022 were a bonanza for energy sector companies and their share prices. Indeed, energy was the best-performing sector last year,

The energy sector is the largest positive contributor to the S&P 500’s earnings performance for the fourth quarter of 2022. If this sector were excluded, the blended Q4 earnings decline for the entire S&P 500 would increase to -8.9% from -4.8%.

Energy is reporting the highest year-over-year Q4 earnings growth of all 11 sectors at 57.7%. Of course, higher year-over-year oil prices contributed to the improvement in earnings for this sector. The average price of crude oil in Q4 2022 ($82.64) was 7% above the average price for oil in Q4 2021 ($77.10).

All five sub-industries in the energy sector are reporting a year-over-year increase in Q4 earnings of 15% or more: Oil and Gas Refining and Marketing (167%); Oil and Gas Storage and Transportation (88%); Oil and Gas Equipment and Services (81%); Integrated Oil and Gas (57%); and Oil and Gas Exploration and Production (17%).

Will energy repeat its outsized performance in 2023? Last year set an extremely high bar, so the odds are against another blockbuster gain for energy. However, as the price of crude oil begins another upward trajectory, the sector still has investment appeal. Paradoxically, energy’s gain could have negative implications for the overall economy.

Editor’s Note: If the energy sector is too volatile for your taste but you’re still looking for market-beating profits, I suggest you consider the advice of my colleague Dr. Joe Duarte.

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As chief investment strategist of our premium trading service Weekly Cash Machine, Dr. Duarte leverages a “fear-based” algorithm that uncovers instant cash codes that could generate up to $1,600 per week in extra income, regardless of crude oil price trends, geopolitical events, Fed policy, or the path of inflation.

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John Persinos is the editorial director of Investing Daily.

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