“Inception” directed by Nolan is a brain-burning movie that tells the story of “dreams within dreams” and is of epoch-making significance. In the movie, dream worlds are superimposed layer upon layer, and what happens in one world is like ripples, causing major shocks in other worlds several times the magnitude. In reality, from March 6 to April 26, 2020, the fluctuations in international oil prices were even more mysterious than “Inception”. This is destined to be the most ups and downs and turbulent 50 days in the history of crude oil. “Oil Price” will also be recorded in the history of crude oil for a century.
What’s interesting is that in early September, when Nolan’s “Tenet” was released in China and the United States, international oil prices also began to experience a sharp correction for five consecutive days, falling by more than 13%. In addition, on September 6 Saudi Arabia’s national oil company Aramco has lowered the price of all grades of crude oil exported to Asia and the United States in October. International oil prices have once again attracted market attention. Will the market situation in March repeat?
Four factors triggered five consecutive declines
The plunge in international oil prices in the first half of the year is still fresh in my mind. Negotiations at the OPEC+ meeting that ended on March 6 failed. In order to seize the already significantly reduced market share, the crude oil price war launched by Russia and Saudi Arabia caused the international oil price to halve instantly, which not only triggered the “Black Monday” in global stock markets on March 9 “It was the second circuit breaker in the history of the U.S. stock market since October 27, 1997. Subsequently, major global assets showed a peculiar trend of U.S. stocks, U.S. bonds, and gold falling in the same direction, while the U.S. dollar rose. Since then, the U.S. stock market has experienced circuit breakers four times in ten days. , which in turn triggered a global dollar liquidity crisis. After the Federal Reserve slashed interest rates to zero and launched unlimited quantitative easing for the first time in history, global liquidity risks slowed down significantly.
In the 10 days from April 2 to 12, the international crude oil market staged another thrilling spy game around production cuts. OPEC+’s preliminary intention to reduce production on April 9 and the G20 Energy Ministers’ meeting on the 10th pushed this drama to a climax. On the 12th, the formal agreement reached by OPEC+ on production reduction came to an unsatisfactory end: from May 1, OPEC + The production reduction will be 9.7 million barrels per day and will last until the end of June. The production reduction will be reduced to 7.7 million barrels per day from July to December, and will be further reduced to 5.8 million barrels per day from January 2021 to April 2022.
But at that time, there were still 20 days before the official production reduction began in May 2020. In mid-to-late April, global crude oil inventories accumulated rapidly, and storage capacity faced the ultimate test, triggering huge turbulence in the global crude oil futures market. On April 20, May WTI crude oil futures fell sharply from US$18.27/barrel, hitting a low of -US$40.07/barrel, a drop of more than 300%, and finally closed at -US$37.63/barrel, a drop of 281%, setting a new record in the global financial market. Another miracle, people were fortunate enough to witness the first “negative oil price” in history.
Since then, from the production reduction in May to the end of August, international oil prices launched a desperate counterattack, with WTI crude oil futures prices continuing to rise from below US$20/barrel to US$44.2/barrel on August 26. However, from September 2 to 8, international oil prices fell for five consecutive years, with WTI crude oil falling by 13.4% and Brent oil falling by 13.7%. There are four reasons:
First of all, the reasons for this round of plummeting are: The trigger was Saudi Arabia lowering export oil prices. Recently, Saudi Arabia has lowered the price of crude oil exported to Asia, and Aramco has lowered the price of Arabian Light crude oil exported to Asia in October by US$1.40/barrel. This is the largest price reduction in regional market prices since May. The export price of Saudi crude oil is a price indicator that is closely watched by the crude oil market and often sets the tone for market trends. This price reduction is an action taken by Saudi Arabia to compete for the Asian market, especially the Chinese market. In recent months, Saudi Arabia’s share of the Chinese market has declined significantly, while that of Russia and the United States has increased. But with demand sluggish, Saudi Arabia’s price cuts may not be effective.
Secondly, from the supply side, the reduction in the scale of OPEC+ production cuts combined with the insufficient implementation of global production cuts has increased the supply of crude oil and contributed to the decline in oil prices. At the OPEC+ meeting on July 15, member states unanimously agreed to reduce the scale of OPEC+ production cuts from 9.7 million barrels per day to 7.7 million barrels per day from August to the end of December 2020, officially entering the second phase of the production reduction agreement and promoting 8 The upward slope of international oil prices further flattened in March. However, the implementation of production cuts by global oil-producing countries was less than expected, which was the real reason for exacerbating the continued decline in oil prices in September.
On the one hand, after experiencing a sustained price rebound, OPEC+’s market strategy has shifted from “protecting prices” to “competing for share.” We can see that Saudi Arabia and Kuwait have taken the initiative to increase production, as well as Iraq and Nigeria’s compensation cuts fell short of expectations. In August, Iraq’s production only dropped by 70,000 barrels/day month-on-month to 3.72 million barrels/day. According to the previous agreement, Iraq should make compensatory production cuts and its daily output cannot exceed 3.4 million barrels/day. Iraq is currently seeking an extension to complete its excessive production reduction task, which has further intensified concerns about continued expansion of crude oil supply.
On the other hand, WTI prices above US$40/barrel have given North American shale oil an opportunity to resume supply. Since the break-even point of U.S. shale oil is about $40 per barrel, once the oil price breaks through the break-even point, U.S. crude oil supply will rebound quickly. The price of WTI crude oil rebounded to above US$40/barrel in June. U.S. crude oil supply also rebounded slightly in June. In July, the capacity utilization rate of the U.S. mining industry also rebounded for the first time since February.
Thirdly, from the demand side, the second global epidemic combined with Hurricane Laura in the United States has hit the demand for crude oil. Since countries around the world gradually resumed work in May, although refined oil consumption has��It has recovered to about 80% of the level before the epidemic, but restrictions on international travel have caused continued sluggish demand for aviation kerosene. To make matters worse, since August, the global epidemic has rebounded for a second time, which has slowed down the recovery of oil consumption to a certain extent. After a significant rebound in July, the number of new confirmed cases in the United States gradually declined in early August, with the latest daily increase falling to around 30,000. The daily increase in France and Spain exceeded 7,000 and 9,000 respectively, which was higher than during their respective epidemic peaks in April. ; India’s daily new cases are approaching 90,000, with a total of 4.37 million confirmed cases. In addition, the Category 4 hurricane “Laura” made landfall in Louisiana, the United States, on August 27. It was one of the ten strongest hurricanes ever to land in the United States. As a result, the weekly crude oil demand in the United States in early September decreased by 1.15 million barrels per day to 1,312 barrels per day. million barrels per day, a new low since the restart of economic activities in May, exacerbating sluggish demand.
Finally, market risk aversion has increased, which has had a certain negative impact on oil prices. Due to the recent relatively solid economic recovery of developed economies represented by the United States, and the willingness of the U.S. government to provide financial assistance may be marginally declining, even if the Federal Reserve announced the adoption of a “flexible average inflation targeting system” on August 27, it established a policy of continuing to be dovish and easing. However, after entering September, investors were worried that the Fed’s most easing period had passed, and would subsequently tighten monetary easing at the margins, which increased risk aversion, triggered a plunge in U.S. stocks and a rebound in the U.S. dollar, and international oil prices naturally could not escape the risk aversion. rise. As of the week of September 1, WTI commercial long positions fell 28.58% from the April high, which reflects the accumulation of bearish sentiment in the market and has a negative impact on oil prices.
Whether international oil prices will rise or fall in the future
Before the US election in November, we believe that both the global financial market and the commodity market are facing greater uncertainty. The trend of international oil prices will be determined by the following three factors: Determined by several important variables, it is expected that international oil prices may fluctuate in the range of 35 to 50 US dollars per barrel in 2020.
First, whether the new coronavirus vaccine can be implemented, once it is available, it will push up oil prices. The latest data shows that more than 27 million people around the world have been infected with the new coronavirus. The advent of the COVID-19 vaccine may eliminate people’s psychological worries about the epidemic. Even if the epidemic cannot be completely controlled soon after the vaccine is released, it will greatly reduce the virus’s ability to spread, improve residents’ travel safety, and further reduce the impact of the epidemic on economic activities. The negative impact will push the economy from structural repair to comprehensive recovery, thereby pushing the core variable of international crude oil pricing from the supply side to the demand side again, so oil prices are expected to gradually rise.
Second, how will the Federal Reserve adjust its economic outlook at the September FOMC interest rate meeting. At this meeting, the Federal Reserve will update its economic forecast for June, with a high probability of revising the economic forecast upward, and may also hint at when unlimited QE will be withdrawn. The market will interpret future policy signals from the magnitude of the upward revision and the statement. If the upward revision is too large, the market may interpret it as a hawkish signal, market risk appetite will still decline, and a short-term decline in oil prices may be inevitable. Personally, I believe that since this recession is an exogenous shock and the scale of relief provided by various governments, especially the United States, is unprecedented, the global economic rebound will be relatively stable, and economic growth and inflation will return to normal levels faster than during the 2008 global financial crisis. Therefore, the Federal Reserve The pace of return to normalization of monetary policy may be relatively fast, which is also the biggest hidden danger of U.S. stocks and even international oil prices being suppressed by funds in the short term.
Thirdly, the results of the US election will also have a greater impact on oil prices. Since Trump still lags behind Biden in polls, Trump may continue to increase the pressure on China before the election. Global geopolitical risks remain high, which will provide some support for oil prices. In addition, against the background that the U.S. economic recovery continues to exceed expectations, even without a rescue plan, the U.S. labor market is still better than expected, and the unemployment rate has dropped significantly, which may further reduce the willingness of members of Congress to support a new round of rescue. Especially as the general election enters a heated stage, the bailout plan is more beneficial to black voters who support Biden, and the White House’s willingness to bail out may also be marginally reduced. We do not rule out the possibility that the two sides cannot reach an agreement by the end of September or even before the election. Even if an agreement is reached, the scale may be lower than market expectations. This will have a certain negative impact on oil consumption demand.
Looking forward to the first half of 2021 after the election, as global crude oil demand continues to recover and supply continues to shrink, the market has entered a destocking stage, and oil prices will maintain a steady increase. If Trump is re-elected, global risk appetite will increase, which will help oil prices rise. If Biden is elected President of the United States, he may adopt policies such as tax increases and strict regulations, which will be detrimental to economic growth and risk appetite, and will restrain the overall increase in oil prices to a certain extent. As analyzed previously, the uncertainty about the actual implementation of the agreed production cuts and the recovery of market-oriented supply brought about by rising oil prices will still cause oil prices to undergo periodic corrections. However, due to the early low oil prices, global integrated oil companies have significantly reduced their capital expenditures, and thus As a result, global crude oil supply may exceed demand, and the current short-term fluctuations in oil prices will not change the mid- to long-term recovery trend. </p
