Sudden! Crude oil has collapsed, and the market outlook needs to focus on the demand side

The Federal Reserve just released big news, and international oil prices suddenly collapsed! There was a huge earthquake in commodities last night. During the U.S. stock market, WT…

The Federal Reserve just released big news, and international oil prices suddenly collapsed!

There was a huge earthquake in commodities last night. During the U.S. stock market, WTI crude oil fell by 5.00% and Brent crude oil fell by 4.91%. As of morning’s close, WTI crude oil closed down 5.31% on Wednesday. Brent crude oil ended down 5.19%.

Negative factors superimposed, and both internal and external crude oil prices fell sharply.

On the first trading day of the new year, international oil prices fell sharply. International crude oil continued its decline on Wednesday, while the domestic crude oil market also experienced a sharp drop. As of midday closing, the main domestic crude oil futures contract fell by 5.23%.

Yang An, head of energy and chemical research at Haitong Futures, analyzed that the direct cause of the sharp drop in oil prices on the first trading day of the new year was the sharp drop in natural gas prices in Europe and the United States. Temperatures in Europe this winter are higher than seasonal normals, and temperatures in the United States are expected to get warmer by mid-January. The cold winter energy crisis theme previously hyped by the market has not appeared. Fuel consumption has decreased and the outlook has been weak. Natural gas futures prices have continued to correct. European natural gas prices also hit their lowest level since the Russia-Ukraine conflict on Monday. The price of U.S. natural gas futures contracts continued to plummet nearly 8% on the first trading day of 2023, which also weakened the speculation of alternative demand for oil. The oil product market Sentiment was clearly affected, with prices weakening across the board. In addition, there is news that OPEC production will increase by 150,000 barrels per day in December 2022 due to factors such as the rebound in production in Nigeria and other countries. The downward pressure on the economy at the macro level and the strength of the US dollar have also limited the performance of risk assets, and various bearish factors This resulted in a sharp drop in oil prices.

“Nigeria, whose output has been below the OPEC+ production reduction target line for a long time, has experienced a substantial increase in December 2022, which to a certain extent has triggered market concerns about increased supply.” Zheng Mengqi, an energy researcher at Hizheng Futures, said that in addition, the weather in Europe and the United States has warmed. Temperatures in some places in Poland and the Czech Republic were close to 20 degrees Celsius, and the temperature of 6 degrees Celsius in some places broke local records; although the temperature in the United States did not break the record, after the Christmas winter storm, the temperature in most areas will be higher than normal. Less natural gas needed to heat homes will reduce inventory pressure, while natural gas production quickly returns to near record levels as the cold weather recedes. Affected by this, U.S. natural gas prices fell below $4/mmBtu, and the European benchmark TTF Dutch natural gas futures price once fell to the lowest level since February 21, 2022.

“Macro risks have not subsided. The IMF predicts that one-third of the world’s economies will be hit by recession in 2023. As the Russia-Ukraine conflict has dealt a huge blow to the euro zone, half of the EU countries will fall into recession. The U.S. dollar index has risen sharply, and the bulk Commodity prices are under pressure,” Zheng Mengqi analyzed.

Jin Yunli, a crude oil researcher at Chuangyuan Futures, believes that the impact of Nigeria’s increase in production on global crude oil supply is relatively limited. In terms of production, we still need to pay attention to traditional oil-producing countries in the Middle East such as Saudi Arabia and the United Arab Emirates. The downward pressure on oil prices still mainly comes from pessimistic expectations on the demand side.

The market outlook needs to focus on the demand side

“The market is currently paying close attention to whether the demand side can effectively recover, especially the final impact on global crude oil demand after China’s epidemic prevention and control policy adjustments. At present, there are different views in the market, including optimistic expectations and short-term concerns. Ultimately, It will take time for the market to make a more complete assessment of its impact.” Yang An told reporters.

Looking forward to the market outlook, Yang An said that oil prices fell sharply at the beginning of the new year, which had a certain impact on the morale of bulls. However, in the context of the previous period when the global economy was generally not optimistic about 2023, the market was relatively pessimistic about the demand side of crude oil in 2023. This is why OPEC+ had to make a new decision to cut production by 2 million barrels per day in October 2022. reason. With the adjustment of China’s epidemic prevention and control policies, the demand expectations of the largest crude oil importing country in the later period have brought hope to the market. The core influencing factor of oil prices in the later period depends on whether the performance of the demand side meets expectations, which is the focus of the market. Yang An has a relatively optimistic expectation on this, and he believes that the demand side may have better-than-expected performance. In addition, Russia has previously stated that it will reduce production by 5% to 7% in early 2023. Whether the supply side is further tightened, such as the implementation of OPEC+ production cuts, is also an important factor for follow-up attention. In addition, the Fed’s monetary policy at the macro level will also have an impact on oil prices and requires close attention.

“If oil prices do not break through the upper resistance, there is a high probability that they will enter a stage of oscillation and momentum building, but there is still a high probability that they will remain strong in the first half of the year.” Yang An said.

Zheng Mengqi’s analysis pointed out that from the current crude oil fundamentals, on the supply side, U.S. crude oil production is limited by capital expenditures and is difficult to expand significantly in the short term. Snowstorms and severe cold weather caused a temporary decline in shale oil production in the early stage. After the extreme weather, supply quickly recovered; OPEC+ maintains the current production cut of 2 million barrels per day and has a strong willingness to support prices. In response to the EU’s oil price ceiling, Putin issued a decree. If Russia proactively reduces production in the future, the decline in global crude oil supply will increase. On the demand side, during the New Year’s Day holiday in 2023, there were 52.7134 million domestic tourism trips across the country, a year-on-year increase of 0.44%, and domestic tourism revenue was 26.517 billion yuan, a year-on-year increase of 4.0%, recovering to 42.8% and 35.1% of the same period in 2019 respectively. my country’s first batch of refined oil export quotas for 2023 were recently issued, totaling 18.99 milliontons, a year-on-year increase of 46.08%, a significant increase compared with the 2022 batch. As domestic epidemic control measures are relaxed, domestic demand recovery is expected to be relatively good.

On the macro level, Zheng Mengqi said that according to the dot plot released in December last year, the United States still has room to raise interest rates by 75 basis points in 2023, and the global economic recession is expected to be strong, which will suppress the prices of commodities such as crude oil.

“If WTI crude oil continues to fall to around US$70/barrel, the demand for supplementary SPR in the United States will provide certain support for oil prices. OPEC+ will also take price support measures in response to the falling oil prices, including increasing production cuts and releasing production reduction expectations. However, “If crude oil prices continue to rise, the economic recession caused by the Federal Reserve’s sharp interest rate hikes and the negative demand feedback caused by high oil prices will also limit further rises in oil prices. Therefore, crude oil prices will still mainly oscillate in a wide range.” Zheng Mengqi analyzed.

Jin Yunli believes that the overall crude oil market has not experienced oversupply. In 2023, oil prices will most likely still fluctuate at high levels based on declining demand in Europe and the United States, post-epidemic recovery of domestic demand, and dynamic regulation of the supply side by OPEC+ and Russia.

In terms of supply, judging from the previous statements of OPEC+, OPEC+ will still actively regulate supply in 2023; the U.S. storage sell-off ends, the SPR will start to restock, and the purchase and storage price around US$70/barrel will still provide strong support for the bottom of oil prices; The shipping volume of Russian crude oil has dropped significantly after the sanctions took effect. The embargo on refined oil products is about to take effect on February 5. The tight supply side can still provide strong bottom support for oil prices.

In terms of demand, demand in countries such as Europe and the United States is likely to decline. Waiting for further confirmation from the reality, domestic epidemic prevention and control measures have been adjusted, and short-term terminal consumption is still under pressure. As the peak of domestic infections has been successfully passed, the mid- to long-term positive trend remains unchanged. The Ministry of Commerce of the People’s Republic of my country issued the first batch of refined oil export quotas for 2023, totaling 18.99 million tons, a significant increase of 46% year-on-year. Nearly 90% of the quotas were distributed to the four main refineries. The export profits of gasoline and diesel have recovered significantly towards the end of the year. It is expected that this round of exports The issuance of quotas can still effectively boost domestic refined oil exports and is beneficial to the recovery of the operating rate of main domestic refineries.

“Crude oil supply and demand remain in a tight balance, and the fundamentals do not support a continued sharp decline in oil prices. If there are more tightening controls on the supply side in the later period, oil prices will still have some upward momentum.” Jin Yunli said that he has recently paid attention to Russia’s countermeasures against Western countries. of refinement. The Russian Deputy Prime Minister recently stated that the Russian government is formulating legal procedures to implement the presidential decree on measures to limit the price of Russian oil in the G7. Russia plans to issue a mechanism to implement the decree after the New Year holiday (after January 9).

Li Jie, a researcher at CCB Futures, said that on the supply side, Russia’s oil exports decreased month-on-month in December 2022, with Ural oil exports falling by 16%. In the later period, under the influence of shipping and insurance, Russian supply is expected to tighten further. On the demand side, although some countries have promulgated restrictions on entry into my country, from a domestic perspective, road traffic and subway passenger traffic in major northern cities have begun to recover, and the congestion index in southern cities has basically bottomed out, superimposing the first batch of 2023 The export quota of refined oil products has increased significantly by 46% year-on-year, which will continue to stimulate the purchase of raw materials for refineries. It is expected that my country’s crude oil demand will gradually recover after the Spring Festival. “The crude oil market is expected to be strong, and the benefits are gradually emerging.”

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Author: clsrich