Crude oil prices continued their downward trend last week, completely getting rid of the boring oscillation market, and also allowed pessimistic expectations to spread rapidly. Judging from the market situation, the sharp decline in crude oil prices is not due to a very strong driving logic in the market, nor is it a substantial deterioration in fundamentals, but due to the accumulation of adjustment expectations and the release of macro risks in the previous three months.
In summary, the market has not made sufficient adjustments during the consolidation in the past three months, and the low volatility oscillations have accumulated greater risks in the market. The high decline in U.S. stocks has brought more uncertainty to the macro market. Whether the U.S. stock market can stabilize currently depends mainly on when the new round of U.S. economic stimulus plans will be implemented and Trump’s determination to maintain the stock market. There are some signs of loosening on both the supply side and the demand side, which has also cast a shadow over the fundamentals. On top of this, Saudi Arabia has lowered its official sales price, confirming the pessimism.
However, we have always believed that the short-term decline in oil prices will lay the foundation for the upward trend in the fourth quarter. If oil prices are to rise sharply around US$45/barrel, there must be strong cooperation from the demand side. The short-term downward trend has suppressed potential supply growth while also promoting the release of some demand, which is not a bad thing for the future.
From the perspective of the three major crude oil markets, the Chinese market is the weakest market. This has a lot to do with the large number of floating tank inventories around China and ultra-high crude oil warehouse receipts. At present, the Chinese market is still seriously underestimated. There is news that Korean companies have begun to receive SC warehouse receipts. The strengths of Brent and WTI are basically the same. On September 15, the U.S. ban on Huawei will take effect. Whether TSMC and other companies can continue to manufacture for Huawei will directly determine the short-term direction of Sino-U.S. relations. The macro market weather vane is still relatively important.
In addition, the new round of stimulus plan in the United States continues to be fruitless. The Republican Party has compressed the stimulus plan to US$500 billion, which is far from the Democratic Party’s US$2.2 trillion. Therefore, in the short term It will be difficult to achieve an effective stimulus plan within a short period of time. Once the stimulus plan fails, there will be a risk that U.S. stocks will continue to fall, and the macro market will weaken again, which will not be conducive to the recovery of crude oil prices. The current international market dynamics and international relations are too uncertain. Although crude oil prices have stabilized at 40 US dollars per barrel in the short term, the current range is not necessarily the bottom. Therefore, we still need to wait patiently for the trend of international relations to become clear and for crude oil prices. bottom signal.
Inventory, as the final result of the game of supply and demand, can directly reflect the current market fundamentals. Therefore, observing the trend of inventory can reveal the future The possible direction of prices is closely related to the recent weakness of the Chinese market and the inventory structure. First of all, China’s crude oil demand was released ahead of schedule. Due to the low oil prices in the first and second quarters, many companies saw the opportunity to purchase at low prices and purchased large quantities of crude oil, causing China’s crude oil imports to rise rapidly in the first half of the year. Customs data shows that China’s cumulative crude oil imports from January to August reached 367.54 million tons, compared with 327.8 million tons in the same period last year, which is approximately equal to the cumulative imports from January to September last year. The crude oil import volume in 2019 is also much higher than that in 2018!
After July, China’s crude oil imports declined significantly, and began to decrease month by month in July. The crude oil imports in August were 47.48 million tons, compared with June’s Imports fell by 5.7 million tons from the peak of 53.18 million tons. Based on the statistics of loading port diameter, China’s main purchasing time is in April and May, which happens to be the time when crude oil prices are at their lowest. This oil hoarding can be said to be a big win, and the refinery has enjoyed the benefits of low purchasing costs. dividend.
A side effect of large-scale domestic procurement is that domestic ports are extremely crowded. It is understood that ports in Shandong and the south are still relatively congested and have long demurrage times, especially in Shandong. Some ports have been queuing for more than a month, which is partly related to local refineries purchasing large amounts of crude oil. Judging from the floating storage data, the crude oil floating storage volume around China is still relatively large and has not improved significantly at present. Domestic onshore inventories are also relatively high. These inventories are a key factor restricting China’s future demand.
In addition, because the exchange has increased the storage costs of crude oil delivery warehouses, resulting in risk-free profits for oil storage arbitrage, the volume of warehouse receipts in the SC market has increased significantly. For ordinary customers, there are many restrictions on receiving warehouse receipts, so there are not many companies that can actually receive warehouse receipts. The combined lack of import quotas makes the bulls in the SC market particularly cautious. The high volume of warehouse receipts has a greater impact on the market in recent months. big.
By comparing domestic warehouse receipts and positions, we can see that positions can reflect the changing trend of warehouse receipts in advance, and the impact time period is about 3 months. However, due to the lack of historical data for comparison, we cannot verify the general validity of the relationship. Based on this time relationship, the warehouse receipt volume in the short-term SC market will further decline, which will be very helpful in repairing undervalued SC. Therefore, companies that are currently able to receive SC warehouse receipts can make early preparations and absorb lower-cost warehouse receipts through delivery or EFP.
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From the global crude oil inventory and refined oil inventory, the inventory situation this year is not optimistic. , which is also the main reason why crude oil prices are still around US$40 per barrel after the global water release and OPEC+’s historic production cuts.
Although global crude oil inventories have declined compared with the worst period of the epidemic, the decline is relatively limited, and the current gap is large compared with the same period in history. Refined oil inventories are more pessimistic than crude oil inventories. There has been no obvious destocking behavior since the outbreak. Therefore, we have reason to believe that the current global demand for crude oil is still relatively weak.
As of September 11, the number of new confirmed cases in India in a single day has reached 95,000, setting not only a single-day record for India, but also a global record. Judging from India’s new growth trajectory, it is likely that the number of new arrivals in a single day will exceed 100,000 per day over the weekend or next week. India succeeded in surpassing Brazil last week and became the second in the world in cumulative confirmed cases. Will it surpass the United States and become the first in the world one day in the future? It doesn’t seem impossible. Based on the current difference, India will only need one month to do it…
Image source: Morgan Stanley
The inventory data in the United States is also the focus of our attention. Last week’s EIA data is still not completely free from the impact of the hurricane. Crude oil production has begun to recover, but the affected refineries have not fully recovered. U.S. crude oil production rose by 300,000 barrels last week, returning to 10 million barrels per day again. U.S. refinery operating rates fell to 71.8%, the lowest level in five years. Affected by this, U.S. crude oil inventories increased by more than 2 million barrels.
From the perspective of the overall inventory cycle, U.S. crude oil inventories are about to enter the seasonal accumulation stage. The time cycle is probably from the end of September to the beginning of October. However, due to the special circumstances this year, a considerable part of Demand has been suppressed by the COVID-19 epidemic. Therefore, whether U.S. crude oil inventories will continue to follow seasonal logic this year depends on the recovery of the U.S. economy and the control of the epidemic. If vaccines can be widely spread in the United States and economic activity resumes, a counter-seasonal inventory cycle decline may still occur this year as demand for U.S. crude oil picks up.
It should be noted that there is still no timetable for the U.S. economic stimulus plan. Affected by this, U.S. stocks have the momentum to continue to decline. The stimulus plan reflects the United States’ determination to continue to release money. Under this situation, if the market is still open, the U.S. stock market, which has risen due to the flood, will lose support. At the same time, the macro market with U.S. stocks as the vane will not be conducive to the stabilization and recovery of crude oil prices.
From the supply side, the main variables in the current market are still concentrated on the OPEC production reduction agreement. Although there is news that OPEC’s production reduction agreement has been relaxed, the data in August is still relatively optimistic, so we do not doubt that OPEC will make small moves to reduce production. Especially after the price of crude oil fell below 40 US dollars per barrel, OPEC was afraid to act rashly due to the pressure of fiscal revenue. Maintaining production cuts or even exceeding production cuts is still OPEC’s best choice.
Judging from the relationship between the number of drilling rigs in the United States and crude oil prices, the number of drilling rigs in the United States has reached a critical value. As prices rebound, the number of drilling rigs in the United States is expected to see a rebound. There is still a certain time lag between the number of drilling rigs and the reflection of crude oil production. So if the price can remain above $40/barrel, we are likely to see the bottoming out of the number of drilling rigs in the United States in the short term. If the price of crude oil remains below $40/barrel, it will be lower than the cost of shale oil extraction. The U.S. rig count is likely to continue declining.
In summary, the United States, Russia and OPEC have no possibility of significantly increasing production, so we must focus on the direction of the macro market and changes in demand, and also pay attention to the development of vaccines. , vaccines are a key factor that can change the entire macro situation.
Back to oil prices, although short-term fundamentals are weakening, the pattern of global liquidity release There is still no change, and we still maintain a certain degree of confidence in the recovery of the global economy and the release of liquidity. If crude oil prices do not fall significantly in the third quarter, then crude oil prices in the fourth quarter may be in danger. After all, prices have been consolidating for so long, and the market has accumulated too many risks that need to be released. Fortunately, the short-term weakening of oil prices has also laid a good foundation for the upward trend of crude oil prices in the fourth quarter. Fundamentals remain relatively tight, coupled with possible macroeconomic favorable factors, crude oil prices are likely to break through the current level in the fourth quarter. Within the consolidation range, Brent prices are expected to hit $50/barrel.
Therefore, investors with weak risk tolerance still need to wait patiently for the bottom signal to appear. Investors with price lock-in needs may have strong risk resistance and intend to hold for a long time. For investors, the crude oil market has important strategic investment significance. In terms of target selection, since the amount of short-term SC warehouse receipts is very large, the front-month contract will remain relatively weak. You can actively deploy far-month contracts or choose varieties with relatively good fundamentals such as asphalt to carry out the fourth quarter strategy. layout.
In view of the tight situation and the possible positive macro factors, crude oil prices are likely to break through the current consolidation range in the fourth quarter, and Brent prices are expected to touch US$50 per barrel.
Therefore, investors with weak risk tolerance still need to wait patiently for the bottom signal to appear. Investors with price lock-in needs may have strong risk resistance and intend to hold for a long time. For investors, the crude oil market has important strategic investment significance. In terms of target selection, since the amount of short-term SC warehouse receipts is very large, the front-month contract will remain relatively weak. You can actively deploy far-month contracts or choose varieties with relatively good fundamentals such as asphalt to carry out the fourth quarter strategy. layout.
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