Report Summary
Trend Rating: Crude Oil: Bullish
Report Date : July 19, 2021
★OPEC+ held an extraordinary meeting to eliminate uncertainty about production reduction policies
If production is increased by 400,000 barrels per day per month, OPEC+ will reduce production by September 2022 Will exit them all. The adjustment of the production reduction baseline will have basically no impact on production changes before April 2022. The main impact is reflected in the redistribution of production shares within the alliance starting from May next year. The production baselines of countries with large idle production capacity have been raised. The main purpose is to more effectively release OPEC+’s idle production capacity.
★The mutated new coronavirus has increased uncertainty about the recovery of jet fuel
OPEC+ has basically clarified the tone of gradually withdrawing from production cuts, and market uncertainty will return to the demand side in the second half of the year. Road fuel consumption in Europe and the United States is basically close to pre-epidemic levels. Due to seasonal factors, the third quarter is expected to be the peak of road fuel consumption during the year, and there is still a gap between supply and demand. Jet fuel is expected to become a major variable in the second half of the year. Mutated viruses may affect the relaxation of border controls and hinder the short-term recovery of jet fuel. However, if the epidemic situation further improves in the fourth quarter and substantial progress is made in relaxing border controls in various countries, the recovery of jet fuel consumption may be in The fourth quarter exceeded expectations.
★Investment Suggestions
Oil prices have experienced a correction recently. On the one hand, it is due to concerns caused by the instability of OPEC+ policies, and on the other hand, the epidemic situation in some countries has rebounded due to the mutated new coronavirus. The outcome of the OPEC+ meeting has temporarily eliminated the policy risk of a substantial short-term increase in production, supporting oil prices. The current main risk point in the market is that the Delta variant virus poses a certain threat to the prospect of demand recovery, especially the increasing uncertainty about the recovery progress of jet fuel. Short-term oil prices may continue to price in the risk of the epidemic, but the magnitude of the correction may be limited, maintaining the volatility of oil prices in the third quarter. Strong expectations.
★Risk Warning
The return of U.S. supply is faster than expected.
Full text of the report
1 OPEC+ held an extraordinary meeting to eliminate uncertainty about the production reduction policy
OPEC+ held an extraordinary meeting on July 18 to discuss the output policy for the latter stage. The extraordinary meeting meant that the UAE and OPEC+ shook hands and made peace. In terms of production increase, OPEC+ will increase production by no more than 400,000 barrels per day from August as originally planned. OPEC+ plans to fully cancel the 5.8 million barrels per day production cut by September 2022, subject to market conditions. As for production benchmarks, another focus of market attention, five major member states, including Saudi Arabia and the United Arab Emirates, are allowed to raise their production benchmarks starting in May 2022. Among them, the UAE’s production baseline will be raised to 3.5 million barrels per day, which is low. From the originally proposed 3.8 million barrels per day and the previous market rumor of 3.65 million barrels per day, Iraq and Kuwait will each increase their prices by 150,000 barrels per day, while Saudi Arabia and Russia will increase their prices to 11.5 million barrels per day.
The actual output of OPEC+ in the first half of the year was less than the agreed production limit. On the one hand, it was due to Saudi Arabia’s slow withdrawal from voluntary production cuts in the past two months. On the other hand, it was also due to the ineffective share of the increase in production. Nigeria and Angola’s ability to increase production is limited, while Russia and Iraq still have overproduction. As of July this year, OPEC+ still maintains a production reduction of 5.481 million barrels per day. If production is increased by 400,000 barrels per day per month, all production cuts will be withdrawn by September 2022. The adjustment of the production benchmark will basically have no impact on the production changes of OPEC+ member countries before April 2022. The main impact is reflected in the redistribution of production shares within OPEC+ members from May next year. The Saudi Energy Minister stated that the new OPEC+ production benchmark will not affect the overall monthly production increase rate of 400,000 barrels per day. This statement shows that the total monthly production increase will remain unchanged, but the production benchmark adjustment will affect the output of each member country. The share of the five countries whose production benchmarks have been raised will rise from the current 77.5% to 78.3%. We believe that the adjustment of the benchmark may also be based on the consideration of stabilizing the unity of the alliance. Whether it is from the perspective of stable production capacity or the output during the price war in April last year, Russia’s output can only reach 10.5 million barrels per day, which is significantly lower than the new benchmark. of 11.5 million barrels per day. Even Saudi Arabia has only produced more than 11 million barrels per day during the price war last year in the past five years. According to current production estimates, OPEC+’s idle production capacity is basically concentrated in the five countries whose production benchmarks have been raised, with a total scale of 6.83 million barrels per day. Starting from May next year, the scale of monthly production increases of member states whose production benchmarks have been raised can increase slightly. , so we believe that the main purpose of the benchmark adjustment may be to release OPEC+ idle production capacity more effectively.
2 OPEC+ makes it clear that it will gradually withdraw from production cuts, and the mutated new coronavirus makes Uncertainty about the recovery of jet fuel has increased
The monthly gradual production increase plan of 400,000 barrels per day finally reached at the meeting is basically consistent with previous market expectations, and although the scale of adjustment to the production benchmark is Exceeded expectations, but the execution time will be later than market expectations. OPEC+ still conveys its intention to stabilize the market. On the one hand, it is to implement a gradual increase in production as planned to avoid the risk of excessive supply shortage in the market, which will lead to a surge in oil prices. On the other hand, it is to eliminate the market’s internal divisions in OPEC+, which will lead to a sharp increase in production in the short term.Added worries.
OPEC+ has basically clarified the tone of gradually withdrawing from production cuts, and market uncertainty will return to the demand side in the second half of the year. Judging from the current demand recovery in major consumer markets, road fuel consumption in Europe and the United States was basically close to the 2019 level at the end of June, but there is still a large gap in jet fuel consumption. Indian road demand began to bottom out in June and is currently on an upward trend. However, demand in Southeast Asia is still declining due to the impact of the epidemic. Due to seasonal factors, the third quarter is expected to be the peak of road fuel consumption during the year. It is expected that there will still be a gap between supply and demand. The recovery of jet fuel demand may become an important variable in future demand. The recent emergence of the new coronavirus Delta variant may delay the relaxation of border controls in various countries, hindering the short-term recovery of aviation fuel and taking longer to recover. However, if the epidemic situation further improves in the fourth quarter and substantial progress is made in relaxing border controls in various countries, aviation The recovery in coal consumption may exceed expectations in the fourth quarter, thus offsetting the seasonal decline in road fuels to some extent.
3 Investment Suggestions
Oil prices are at The recent correction is due to concerns caused by the instability of OPEC+ policies on the one hand, and the rebound of the epidemic in some countries due to mutated new coronaviruses. The outcome of the OPEC+ meeting has temporarily eliminated the policy risk of a substantial short-term increase in production, supporting oil prices. The current main risk point in the market is that the Delta variant virus poses a certain threat to the prospect of demand recovery, especially the increasing uncertainty about the recovery progress of jet fuel. Short-term oil prices may continue to price in the risk of the epidemic, but the magnitude of the correction may be limited, maintaining the volatility of oil prices in the third quarter. Strong expectations.
4 Risk Warning
The return of U.S. supply is faster than expected. </p
