This week the Federal Reserve hinted for the first time that it will raise interest rates twice before the end of 2023, and will increase the overnight reverse repurchase facility interest rate and the excess reserve interest rate by 5 points. basis points, which was interpreted by the market as the Fed’s hawkish attitude. Affected by this, the price of gold fell sharply for two days, and the price of copper also fell sharply. Almost all commodities were not spared. The change in the direction of the financial market has dealt a blow to the bulls, and even the strongest crude oil has fallen sharply. However, compared with the correction range of 5% to 10% in other commodities, crude oil still performs well.
This week, crude oil prices began to consolidate at a high level and within a narrow range after hitting $75/barrel, and then began to adjust after rising from $64/barrel to $74/barrel. . In addition, the super cycle of the crude oil market was mentioned again. The main logic is that insufficient upstream investment will lead to insufficient crude oil production capacity in the future. Once crude oil demand recovers quickly, it will be difficult for the supply side to provide corresponding production capacity in a short period of time. We can also see this sign from the global number of drilling rigs. After the sharp rise in crude oil prices, the global number of drilling rigs did not show significant growth. This is true for both the United States and OPEC. After experiencing a super slump, , the market is obviously more cautious about upstream investment.
Overall, the U.S. dollar index has risen sharply, It is also difficult for crude oil prices to escape the influence of surrounding markets, so price consolidation is normal. At present, the consolidation range of Brent oil price should be 70-75 US dollars/barrel. In the future, we should still pay close attention to the changes in the US dollar index. If the US dollar index continues to rise sharply, then the possibility of oil prices falling below 70 US dollars/barrel cannot be ruled out. If The rise in the U.S. dollar index has slowed down or even weakened, so crude oil still has upward momentum.
Is the U.S. dollar index a stumbling block for oil prices?
On Thursday, the Federal Reserve released the June FOMC interest rate decision. Subsequently, the U.S. dollar index experienced a long-awaited surge. The price of gold plummeted by $60 per ounce from its high point. U.S. stocks After falling from highs, commodities such as copper have not been spared. Crude oil failed to clear the US$75/barrel threshold. The main logic point of the market seems to be slowly changing.
After Thursday’s meeting, Powell was still more considerate of the market’s feelings and did not give a specific time to reduce QE, trying to downplay the possible “interest rate hike panic” in the market. , saying that “interest rate hikes are still in the distant future”. At the same time, Powell also said that once the Federal Reserve tightens monetary policy, it will notify the market in advance. U.S. media analysis said that the Federal Reserve has become more positive in terms of the epidemic and economic risks, but as more Federal Reserve members become hawkish, it is more likely that the Federal Reserve will reduce the scale of bond purchases in advance before the end of this year.
The reason why crude oil prices have been so strong in the past year is not only related to the contraction of supply and the recovery of demand, but also has a direct relationship with global inflation expectations. The Fed’s release of water directly drove up the price of crude oil. If the United States tightens monetary policy, even if the fundamentals are good, bulls will have to lift oil prices against the pressure of the US dollar index, which will undoubtedly bring more resistance to bulls.
Looking back at several super cycles in the crude oil market, when the Brent price was above 85 US dollars per barrel, the U.S. dollar index was below 80 points, and the crude oil price If you want to maintain the bull market trend above US$75/barrel, the US dollar index needs to remain relatively weak. Even if the US dollar index and oil prices rise at the same time during certain periods of time, the room for oil prices to rise is relatively limited. If there is to be a super cycle in the crude oil market in the future, the U.S. dollar index will not be able to strengthen significantly.
However, according to the Federal Reserve’s forecast, even an interest rate hike will be in 2023, so the United States will maintain relatively low market interest rates for a long time. . Although the crude oil market will not be significantly disrupted before interest rates are raised, the impact of short-term expectations has made oil prices more confusing.
The picture shows the US dollar index and crude oil prices (source : WIND)
Underinvestment triggers super cycle?
There has been a sound in the market recently: bulls have set their sights on the further future – underinvestment. Midstream and upstream companies, including Saudi Arabia, JPMorgan Chase, and Trafigura, have issued warnings that amid insufficient investment, a super cycle in crude oil prices is likely to occur in the future.
Saudi Arabia’s Energy Minister said that the lack of new investment in exploration and production may trigger a new super cycle in global oil prices. Saudi Arabia’s energy minister told the Robin Hood investor conference on Wednesday that his job was to prevent such a supercycle, people familiar with the matter said. He has beenWarns speculators about the dangers of short selling. After a series of oil slumps, some state-owned oil companies and international exploration companies have reduced exploration and production budgets to save cash and avoid a new supply glut. Many, including Saudi Arabia’s energy minister, worry that capital spending cuts are excessive and could lead to tight crude supplies as demand rebounds.
JPMorgan’s head of oil and gas research told a global summit that the bank has identified a $600 billion upstream investment gap between 2021 and 2030. Such a shortage would tip the market further toward core OPEC members such as Saudi Arabia, but could ultimately raise questions about the adequacy of spare capacity in traditionally major active members.
Trafigura’s co-head of oil trading also expressed concerns about a lack of upstream investment. He emphasized: “The oil market is excited to get rid of the coronavirus, but it is also underinvested. In the past seven years, we have lost two-thirds of the world’s exploration and production budget, and massive underinvestment is likely to have a global impact The economy is ready to make a comeback before transitioning to renewable fuels.”
From the above remarks, we can see the problems currently faced by the supply side. Although in the short term, the supply side It can match current demand, but once demand recovers quickly, whether there is enough production capacity to make up for the supply gap will become the focus. We can also see this problem from the number of drilling rigs. Although the price of crude oil has soared, the number of drilling rigs in the United States and U.S. crude oil production have not increased significantly. This shows that after a century of negative oil prices, upstream producers are less interested in investment. The attitude has become very cautious.
By analogy, not only US producers have become cautious, but the world is also facing this problem. After crude oil prices returned to two-year highs, the world The number of drilling rigs still does not match the price growth. The main reason is that the oil price rebounded relatively quickly after the plunge. In such a short period of time, the profits accumulated by the drillers did not reach the level of further investment, especially after the price plunge. The cycle of life and death.
From a long-term perspective, if demand recovers quickly, there may be a serious shortage on the supply side. This will depend on the situation faced by oil-producing countries such as OPEC and the United States. When will the temptation of such high oil prices start to increase investment? But even if investment begins to increase, it will still take a long time to reach output. At this time, OPEC’s stock of idle production capacity needs to be tested. (Author’s unit: Haitong Futures)