For the crude oil market, this week will reach a critical “crossroads.”
A piece of news on Sunday made some crude oil bulls begin to worry about the trend of oil prices this week. Market news said that OPEC+ is about to relax the scale of production cuts, and Saudi Arabia proposed to reduce the scale of production cuts from 9.7 million barrels per day to 7.7 million barrels per day in August. It is reported that OPEC+ oil-producing countries will make a final decision on July 15.
Some analysts pointed out that this move may lead to a “tapering panic” in the oil market, and the good days of oil prices will come to an end. Is the matter really that serious?
01 What is the confidence for OPEC+ to restore some production?
This Wednesday, OPEC+ will hold a JMMC meeting. At this meeting, OPEC+ faced a choice between two options:
One is to continue to extend the production cut of 9.7 million barrels per day for one month, and in August Subsequent actions were discussed again at the meeting;
Second, starting from August, the scale of production reduction will be reduced by 2 million barrels per day to 7.7 million barrels per day.
From a fundamental point of view, it seems reasonable for OPEC+ to consider reducing the scale of production cuts at this time.
On the one hand, the most difficult moment for the oil market has passed, and demand for crude oil has recovered. The IEA monthly report on Friday slightly raised its global demand forecast. The IEA raised global demand by 1.5 million barrels per day in the second quarter, which will be hardest hit by the epidemic. The IEA said that a rebound in demand combined with OPEC+’s vigorous production cuts can help digest the inventories accumulated in the first half of this year. Last month, crude oil production dropped to a nearly nine-year low of 86.9 million barrels per day due to factors such as OPEC+ production cuts and reductions in crude oil investment and extraction in the United States and Canada.
On the other hand, due to OPEC+’s sharp production cuts, supply has exceeded demand in some parts of the crude oil market. Jinshi also mentioned last week that due to OPEC+’s large-scale production cuts, medium and heavy sour crude oil has been in short supply. The latest news shows that Saudi Aramco has cut Arab heavy and medium crude oil quotas for at least four Asian refineries in August.
In addition, for the first time, Saudi Arabia is selling its densest crude oil, Arabian Heavy, at roughly the same price as its flagship product, Arabian Light, indicating that the medium-to-heavy crude oil Strong demand in the sour crude oil market. Normally, Arabian heavy oil sells at a discount of about US$2-6 per barrel compared to Arab light oil.
Not only do medium and heavy sour crude oils trade at a higher price than benchmark crude oil, crude oil prices for immediate delivery are also higher than forward contracts. This price pattern is called spot The premium also reflects tight supply in the spot market. Therefore, oil-producing countries such as Saudi Arabia have every reason to expand output.
However, oil-producing countries such as Saudi Arabia also have their own interests in mind to resume some production. Some industry insiders pointed out that as crude oil prices rebound, OPEC+ must consider restoring some production. If it continues to maintain heavy production cuts, it will undoubtedly give up market share, which is a “suicidal” behavior.
However, the key issue facing OPEC+ is how they can appropriately increase production to maintain market share while avoiding triggering a panic about increasing production. After all, the current oil market fundamentals are still very weak. Fragile.
02 Will OPEC trigger a “taper panic” in the oil market?
Although fundamentals support OPEC+ to resume some production. However, some analysts are worried that if OPEC+ begins to relax the scale of production cuts, it may trigger a “taper panic.”
(“Taper tantrum” refers to the panic selling in the U.S. stock and bond markets after the financial crisis when then-Federal Reserve Chairman Greenspan proposed slowing down bond purchases. )
OPEC+’s historic production cuts have brought oil prices back to the level of US$40. After July, affected by the recurrence of the global new coronavirus epidemic, international oil prices have been hovering at the $40/barrel mark. Oil prices seem to be waiting for a signal.
Judging from last week’s positions, crude oil bulls also seem to have begun to question whether oil prices can continue to rebound in the short term. The latest CFTC position report shows that the number of speculative net long positions in crude oil decreased by 8,508 lots last week, marking the second consecutive week of decline; of which the number of long positions dropped sharply by 17,580 lots.
However, crude oil bulls do not need to worry too much. As we all know, financial markets trade in expectations. Reducing the scale of production cuts to 7.7 million barrels per day has long been planned. According to the original plan, this scale should be reduced starting in July, but it was later extended by one month. Therefore, even if OPEC+ decides to reduce production cuts to 7.7 million barrels per day on Wednesday, this is within the plan. As long as the cuts do not exceed expectations, the impact on oil prices will be limited. A “taper tantrum” is unlikely.
In addition, after news broke over the weekend that OPEC+ may reduce the scale of production cuts, many headlines “OPEC will start increasing production in August” can be seen on the Internet. In fact, it is not accurate to say that production has increased. Even if the reduction is 2 million barrels per day, the scale of OPEC+ production reduction is still 7.7 million barrels per day. The degree of production reduction is still very large, and it cannot be said to be an increase in production.
In fact, unless OPEC+ does something beyond market expectations, its impact on oil prices will be limited. The current trend in oil prices is dominated by demand.
03 At present, demand still determines oil prices
Crude oil traders may not treat the pastMore attention is focused on OPEC+, because as early as April, the organization had already given a production reduction roadmap for the next one or two years.
What we should pay more attention to is the demand for crude oil. OPEC+’s policy adjustments are actually in line with changes in demand.
At present, despite OPEC+’s vigorous promotion of production cuts, global crude oil inventories are still very sufficient due to the slow recovery of demand. For this reason, fluctuations in demand still play a leading role in oil prices. If crude oil inventories cannot decline in the next few months, once the second wave of the epidemic causes demand to fall, the downside risk to oil prices will continue to increase.
On the demand side, we are currently facing two major problems:
First, refinery profit margins are slim, and the refined oil market is The recovery is uneven.
As mentioned before, global refiners face two major problems. One is high inventory of refined oil products; the other is low profit margins. If these two problems are not solved, it will be difficult for them to increase production and the demand for crude oil will be difficult to recover further. Gasoline and diesel consumption is expected to rebound to 90% of normal levels in some cases, but fuel demand remains low, only 10% to 20% of normal levels in some European countries.
2. The second wave of the epidemic has added obstacles to the recovery of demand.
In the United States, Australia, Japan and other places, the epidemic is showing signs of secondary spread. Although this time it did not cause great market panic like before, it cannot be ignored that the re-spread of the epidemic may hinder the recovery of demand.
The worsening epidemic situation has once again clouded the demand prospects of many oil-consuming countries. Andy Lipow, president of Lipow Oil Associates in Houston, said the biggest concern for refiners right now is that the outbreak will lead to another round of lockdowns around the world, which will again severely impact demand.
Fu Peng pointed out that with the second spread of the epidemic, expectations for the recovery of global airline stocks were interrupted, and global airline stocks once again fell back to very poor levels. He believes that only if airline stocks rise, crude oil demand expectations can break the deadlock. If airline stocks never rise, oil prices will continue to trade sideways.
Finally, although the fate of oil prices is still determined by demand, investors should remain cautious this week and be careful of short-term fluctuations in oil prices caused by the OPEC+ Ministerial Supervision Committee meeting. </p
