Crude oil breaks through and goes down, is there room for decline?

WTI crude oil’s support at the US$80/barrel mark failed last Friday, and Brent crude oil also fell below the US$85/barrel mark on Monday, both hitting new lows since January …

WTI crude oil’s support at the US$80/barrel mark failed last Friday, and Brent crude oil also fell below the US$85/barrel mark on Monday, both hitting new lows since January this year and severely denting market confidence. Suppressed by the continuous decline in international oil prices, crude oil fell sharply on Monday. The main continuous contract of SC crude oil once hit a new low in the past six months during the day, falling 6.94% to close at 610.3 yuan/barrel.

International crude oil prices have continued to fall in recent days. U.S. crude oil has now fallen below 80 US dollars per barrel, completely giving up all the gains since the Russia-Ukraine conflict, and is similar to the price at the beginning of the year. Benefiting from exchange rate factors, the cost of crude oil imports continues to rise, and domestic crude oil prices are relatively resistant to falling compared with external crude oil prices.

In fact, international oil prices have dropped by 35% from a high price of US$123/barrel on June 14 to the current price of less than US$80/barrel. Faced with the continued decline in international oil prices, Liu Shunchang, an energy analyst at Nanhua Futures, explained that the supply side’s impact on crude oil has weakened marginally, and the market focus has shifted from the previous supply side to the demand side.

“This round of oil price decline began in June and October when the United States released CPI data for May that exceeded expectations. The continued rise in inflation dispelled the market’s idea of ​​the Fed quickly turning to easing, and promoted the Fed’s expectation of accelerating monetary tightening. The market’s expectations for Concerns about economic recession in Europe and the United States continued to grow, and the demand side began to become the focus of the market. Commodity commodities, including crude oil, began a downward cycle. Subsequently, a series of weaker-than-expected economic data confirmed the market’s concerns, and oil prices continued to fall. At the same time, “In the past driving season in the United States, which is the traditional gasoline consumption season, gasoline consumption continued to fall short of expectations.” Liu Shunchang said that as of September 16, the four-week demand for gasoline in the United States fell to the lowest seasonal level since 1997; EIA gasoline and diesel accumulated Inventories exceeded expectations, gasoline cracking fell sharply, and the demand side of crude oil faced a test.

In this regard, Li Yunxu, senior crude oil analyst at SDIC Essence Futures, also told the Futures Daily reporter that since June, the EU has introduced its sixth round of sanctions against Russia. The EU’s embargo on Russian seaborne crude oil and refined oil products will be implemented in December 2022. Starting from February 5, 2023, and February 5, 2023, the market’s expectations for the normal supply of Russian oil during the year have been further strengthened. “OPEC+ is in a steady production increase cycle, and the risk of supply shortage has not become a reality. However, there are signs of further promotion of the Iranian nuclear agreement’s resumption of compliance negotiations, which is marginally negative for oil prices.” Li Yunxu said that the demand side is affected by competitive interest rate hikes by various countries, and the economy The risk of recession has increased, the US dollar index continues to rise, putting risk assets generally under pressure, and oil prices have fallen back from their highs.

“Since September, the supply side has been relatively less disturbed by the news. Russia and Iran’s supply expectations are still highly uncertain, and no new trading main line has been formed.” In Li Yunxu’s view, the intraday fluctuations in oil prices are highly linked to the U.S. dollar. The downward trend is mainly due to the continued rise of the US dollar index and the market’s concerns about the demand outlook in the context of competitive interest rate hikes.

The market has long expected that international oil prices will fall again this year, but the path and timing of the decline are more worthy of consideration.

“In the current international environment, in addition to the confusing situation between Russia and Ukraine, the differentiation of major economies has led to obvious differences in the market’s understanding of macro policies.” An Ran, a senior analyst at Huaan Futures, said that in the past, the core of macro analysis was to pay attention to the changes in the central bank’s monetary policy. Nowadays, we need to pay more attention to the flexible policy regulation of various governments. The direct cause of the general decline in commodities is the economic recession pressure brought about by the Federal Reserve’s interest rate hikes. The decline in risk assets on Monday was caused by the transmission effect of financial markets after several days. Judging from the recent performance of the oil market, in the context of the Federal Reserve’s interest rate hikes, the US dollar has strengthened, and the market’s concerns about economic decline have increased, dragging down crude oil prices.

During the interview, the reporter learned that the core logic that currently dominates the crude oil market is that although the market is still worried that sanctions will cause damage to Russian crude oil production and exports, considering the ability of Russian oil to be transported to Asia, the benefits of sanctions on oil prices are diminishing. The market is increasingly concerned about the expected economic recession caused by the Federal Reserve’s accelerated monetary tightening under high inflation.

Li Yunxu believes that the monthly price difference of futures is an indicator that better reflects changes in fundamentals, and has not followed the decline in oil prices recently. In the medium term, global terminal demand for oil products and refinery start-up data remain relatively stable. This month’s monthly reports from the three major institutions, IEA, EIA, and OPEC, have not made substantial adjustments to their demand estimates for this year and next. The actual impact on demand has been Temporarily limited. On the supply side, OPEC’s August production increased by 618,000 barrels/day to 29.651 million barrels/day, of which Saudi Arabia’s August crude oil production increased by 160,000 barrels/day to 10.904 million barrels/day, and Libya’s August crude oil production increased by 426,000 barrels/day. 1.123 million barrels per day. It is expected that with the reduction of the agreed volume in September, the rate of production increase will slow down significantly.

“According to the EU’s sixth round of sanctions against Russia, the EU’s embargo on Russian seaborne crude oil and refined oil products will begin on December 5, 2022 and February 5, 2023 respectively. Market transactions in the fourth quarter of this year and the first quarter of next year will The main line will also shift from the previous expectations of the Russian oil embargo to the actual reduction of Russian oil, and the fluctuations are expected to be magnified again and the uncertainty is high.” Li Yunxu said, in addition, last week Putin announced that�After partial mobilization, oil prices surged sharply during the session. If the situation between Russia and Ukraine becomes further tense, Russian oil passively or proactively further reduces production and Iran’s production fails to return, the increase in supply next year will be very limited. In his view, the supply and demand side does not support the continued decline of oil prices for the time being, and the dollar is expected to rebound after its rise slows.

“For the international oil market, changes in supply and demand are relatively limited. On the one hand, OPEC+ has not shown an active stance of reducing production to maintain oil prices. The Federal Reserve’s actions to reduce the structural demand for crude oil through monetary policy controls have achieved remarkable results, and the crack price difference of refined oil has fallen rapidly. “On the other hand, the hype over the European energy crisis has eased, and the number of European energy reserves has barely reached the standard after significantly weakening industrial demand.” Enron said that the current risks affecting oil prices are mainly concentrated at the macro level, and the Federal Reserve has firmly stated that it will not hesitate to sacrifice the short-term economy. Inflation must also be combated. The probability of the United States raising interest rates to above 4% within the year has greatly increased. Structural demand may continue to be suppressed, and the price trend of risky assets such as crude oil is not optimistic.

“Overall, the downward trend in oil prices since June 10 may continue.” Liu Shunchang said that Russia’s crude oil production and export resilience exceeded expectations, the recession expectations in Europe and the United States increased, and weak demand for gasoline and diesel were the main negative factors. In his view, OPEC+ reduces production and conducts expectation management to hedge against the negative impact of continued weakening on the demand side on oil prices. The market needs to pay attention to when OPEC+ will take action and the magnitude of production cuts as oil prices continue to fall. Against this background, oil prices may show resistance and a step-by-step decline.

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Author: clsrich