It’s hard to describe the performance of the crude oil market last week. This may be a depressing time for investors whose trading focus is on oil prices. As copper prices soared, gold soared, and the stock market soared, crude oil ended the week lower! This performance shows that investors have become cautious in their expectations of oil prices in the past period.
Last week, oil prices first declined and then rose. First, they fell sharply by US$8/barrel in three trading days under the negative impact of weak demand, which surprised many investors. However, last Thursday and last Friday rebounded sharply, regaining some lost ground, and closed with a long upper shadow line on the weekly line, continuing the oscillating upward trend of oil prices since October. The performance of oil prices is due to changes in supply and demand that have affected investor expectations. On the other hand, there have been major changes at the macro level, which have dramatically changed investor expectations. The U.S. CPI growth rate in October was lower than expected. , underlying inflation seems to have peaked, which will allow the Federal Reserve to slow down the pace of significant interest rate hikes, which has significantly increased risk appetite in global financial markets, and various assets have rebounded significantly.
In addition, there were two obvious changes in the crude oil market last week: First, SC crude oil fell faster than the foreign market last week. However, it rose significantly slower than the external market. The price trend of SC crude oil fully integrates factors such as supply and demand, exchange rate, and the difference between domestic and overseas macroeconomic expectations. According to the tracked trend of the price difference between SC crude oil and international crude oil, the price difference between SC crude oil and international crude oil has remained stable for most of the past week. On Thursday and last Friday, crude oil prices rose by about US$1.5/barrel less than the external market. During this period, the sharp decline in the US dollar further amplified the difference between the internal and external markets of crude oil. This situation occurs in the context of huge changes in the market and differences in investor expectations, and is a normal phenomenon. Second, the overall performance of oil prices last week was significantly weaker than the performance of the stock market, gold, copper and other assets over the same period, and the difference in crude oil cracking may explain this phenomenon. It can be seen from the weak performance of the crack spread that weak demand in the crude oil market dominated investor expectations last week, which has also become the most important reason why oil prices are relatively weaker than other risk assets. Changes in supply and demand in the crude oil market will continue to dominate market expectations in the coming period. From our observations of the market, we are not pessimistic about the performance of oil prices during the rest of the year, and there is a high probability that the relatively strong operating pattern will continue.
Weak demand has become a factor plaguing oil prices at the supply and demand level
The supply and demand aspects of the crude oil market became an important factor dragging down oil prices last week. The U.S. Energy Information Administration (EIA) lowered its crude oil demand forecast for next year, putting downward pressure on oil prices. In addition, weekly high-frequency data showing accumulation of crude oil inventories also dampened market sentiment. The EIA short-term energy outlook report released on November 9 shows that while the global crude oil demand growth forecast in 2022 has been revised upwards by 140,000 barrels per day to 2.26 million barrels, the global crude oil demand growth forecast in 2023 has been lowered by 320,000 barrels. /day to 1.16 million barrels per day. This sharp reduction in demand expectations for next year surprised the market, and became the most negative factor affecting market sentiment in this report. It can be clearly seen that this news has caused investors to re-evaluate market supply and demand, focusing on the tightening of the supply side in the early stage. Changes on both sides have made the outlook for oil prices cautious. In addition, in this report, EIA also lowered its forecast for U.S. crude oil production growth in 2023 by 21% or an increase of 480,000 barrels per day, from the previous 610,000 barrels per day. U.S. crude oil production is expected to increase by 580,000 barrels per day in 2022, from 500,000 barrels per day previously. U.S. crude oil demand growth is expected to be 490,000 barrels per day in 2022, compared with 460,000 barrels per day previously. U.S. crude oil demand growth is expected to be 100,000 barrels per day in 2023, compared with 190,000 barrels per day previously. By tracking the EIA balance sheet, we can see that the overall supply of the crude oil market will be very tight before the first quarter of next year, and the crude oil market will also change from a storage accumulation stage to a destocking stage. Although the EIA has significantly lowered its forecast for crude oil demand next year, the crude oil market supply and demand will remain roughly balanced for the rest of 2023, which will provide significant support to oil prices.
On the supply side, in addition to the reduction in supply caused by OPEC+’s production cuts, the release of strategic crude oil in the United States will also come to an end. In early November, the U.S. Department of Energy sold 15 million barrels of strategic reserve oil to six companies, completing the plan announced by U.S. President Biden in March. The last batch of the largest reserve release plan in history, which means the end of the six-month long US strategic crude oil release plan of 180 million barrels. Judging from the current news, the International Energy Agency has no further plans to release strategic crude oil. The 900,000 barrels per day supply added to the market due to the release of strategic crude oil reserves will also disappear, which will further increase the tension on the supply side. The release of reserves has also reduced the U.S. Strategic Petroleum Reserve (SPR) to its lowest level since May 1984. In order to ensure flexibility, the U.S. Energy Security Envoy stated that the United States needs to repurchase 200 million barrels of oil to replenish the SPR. Last month, U.S. President Biden announced a plan to begin replenishing the Strategic Petroleum Reserve once U.S. crude oil prices fall back to around $70 per barrel. International Energy Agency chief Birol on Wednesday blasted OPEC+’s decision last month to cut production, saying it would cost countries facing an economic recession…The situation has worsened. He said the move had exacerbated inflation, particularly in developing countries, and might need to be “reconsidered.”
In addition, the foreign ministers of the Group of Seven countries stated last Friday that they will implement a price ceiling on Russian seaborne oil in the next few weeks. According to the embargo order, starting from December 5, Western countries will not be able to import Russian oil unless the price ceiling is met. , that is, the transaction price of Russian crude oil is lower than the limit price. According to a report from the Russian Energy Development Center, with the EU’s import ban on Russian crude oil taking effect in December, Russian oil production may drop to 9 million barrels per day that month. It expects daily production in December to be 1.5 million to 1.7 million barrels lower than the June to October average.
Taken together, although weak demand for crude oil is expected to still plague the market from time to time, judging from changes in both supply and demand, supply will be the more certain change facing the crude oil market in the coming period. Although the weak demand side expectations for next year will affect investor expectations, which will affect the upward energy of oil prices, taking a comprehensive look at the current market factors, the probability of oil prices directly weakening is small. At this stage, the physical market has not yet caused market anxiety, but it can be expected that supply-side speculation will have a more sensitive impact on oil prices than the demand side during the year, which means that oil prices cannot be easily bearish in the future.
Macro factors drive risk appetite back up
U.S. CPI cooled more than expected in October, released on Thursday, raising hopes that the fastest price rise in decades is fading and giving the Federal Reserve room to slow its aggressive interest rate hikes. Data released by the U.S. Department of Labor on Thursday showed that U.S. core CPI rose 0.3% month-on-month, with year-on-year growth falling to 6.3% from a 40-year high in September. The overall CPI in October rose by 0.4% month-on-month and 7.7% year-on-year, which was lower than market expectations. While lower core prices are good news, inflation remains too high. Fed Chairman Jerome Powell said earlier this month that officials need to see continued weakening in monthly inflation. He also suggested interest rates could peak higher than policymakers previously expected. Falling indicators of medical services and used car prices suppressed core inflation, while rising housing costs contributed more than half of the overall CPI increase. After the release of U.S. inflation data, the 2-year Treasury bond yield fell 16 basis points, the U.S. dollar plummeted, and U.S. stock markets and commodities rose sharply.
Although the high inflation data in the United States will cause the Federal Reserve to still have expected changes in its subsequent choices of raising interest rates, and will cause market sentiment to fluctuate, it can be seen that the future trend of macro factors has been very clear, and macro negative expectations have reached an inflection point or are very close to it. At the turning point, the negative macro factors that have continued to suppress the financial market in the past period have subsided, and risky assets have also received a breather. In addition, as far as the supply and demand of crude oil itself is concerned, investors will repeatedly weigh between tightening supply and weak demand. Tightening on the supply side will still be the dominant factor in oil prices in the future, while weak demand will affect market expectations from time to time. Judging from the monthly difference, investors are still continuing to bet on tightening supply in the next few months. Once confirmed, it will further become an upward driving force for oil prices.
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