In the past two weeks, the crude oil market has experienced China’s Spring Festival holiday and its return after the holiday. In the past two weeks, oil prices have risen sharply, with Brent prices exceeding US$65/barrel and WTI prices exceeding US$62/barrel. The crude oil market seems to have a steady stream of power and funds to push up oil prices. This wave of rising oil prices has lasted for nearly 4 months, rising from US$35/barrel to nearly doubling now, with almost no correction in oil prices during the process. The rising crude oil prices have repeatedly annoyed investors who have been short-term. Incessantly.
In addition to the rebound in risk appetite at the macro level, which has pushed up investors’ valuations of various assets, the recent rise in oil prices is mainly due to two reasons:
First, the coldest weather in the past 30 years has brought devastation to major oil-producing states in the south, and U.S. crude oil production has dropped by more than 2 million barrels per day. At the same time, Russia’s expectations of increasing crude oil production in February failed to materialize due to the extreme cold weather. Crude oil production fell below the OPEC+ production quota, and some areas were even forced to interrupt pipeline oil transportation.
The second is geopolitical factors. On February 15, the Saudi-led multinational coalition claimed to have intercepted a drone launched by the Houthi armed group allied with Iran, which was loaded with explosives. At the same time, before this, the Houthi armed forces attacked an airport in the southern border area of Saudi Arabia. Geopolitical events caused crude oil prices to break through highs and bulls were afraid to enter the market.
However, as the Biden administration contacts Iran, and Saudi Arabia and Iraq say they are ready to increase production, crude oil prices began to correct after exceeding $65 per barrel. But it’s still unclear whether this pullback is a brief correction as usual or the end of a 4-month uptrend?
Taken together, we are more inclined to believe that oil prices will face a certain degree of correction. When demand has not yet fully recovered, Brent oil prices of US$70/barrel will be an extreme trend. At the same time, as US-Iran relations cool down, once there is substantial action to lift sanctions on Iran, the logic of crude oil’s short-term rise will completely change.
The epidemic prevention and control situation is getting better
Data shows that the recent situation of prevention and control of the new coronavirus pneumonia epidemic is good, and the number of new confirmed cases has dropped significantly. As of February 19, the number of newly confirmed cases worldwide in a single day was 380,000, a continued decrease of 140,000 compared to the same period last month. Among them, there were 67,000 new confirmed cases in Asia in a single day, a decrease of 6,000 compared to the same period last month; 130,000 new confirmed cases in a single day in Europe, a decrease of 70,000 compared to the same period last month. ; The number of new cases in a single day in the Americas was 150,000, a decrease of 160,000 compared to the same period last month; the number of new cases in a single day in Africa was 12,000. Overall, the global epidemic continues to decline from its high point, and the decline is relatively fast. If this trend is followed, it is expected that the global epidemic will be well controlled in the first half of this year, and crude oil demand will return to normal levels by then.
The popularization of vaccines is also gradually accelerating, especially in the United States, where the number of single-day vaccinations is steadily rising. Whether oil prices can truly reach $70 per barrel depends on when demand can be fully restored. As far as the current situation is concerned, the demand side does not support the price to stabilize above US$70/barrel. Judging from the performance of oil prices in the second half of the week, bulls are also somewhat powerless in the process of pushing up.
Variables on the supply side
During the Spring Festival holiday, international oil prices successively exceeded the resistance levels of US$62/barrel and US$65/barrel. , the main reason is that in addition to the logic of macro “water release” that we have often mentioned before and the logic of OPEC+ production reduction and Saudi Arabia’s voluntary production reduction, the sudden extreme cold weather attack in the United States is an important driving force. Extreme cold weather has caused a sharp decline in U.S. crude oil production, and bulls have enough reasons to push prices higher. However, the extremely cold weather not only affects the supply side, but also affects the demand side of the United States, and market comments say that U.S. crude oil production will gradually recover in the future.
Goldman Sachs said that the impact of extreme cold weather in the United States on the global oil market will be limited. U.S. onshore crude oil production is expected to drop by an average of 700,000 barrels per day in February, and extreme weather shocks will support the oil supply gap in the short term. Industrial and shale gas industry shutdowns due to ice will reduce refinery capacity by 50,000 barrels per day and diesel consumption by 150,000 barrels per day. Road blockades and flight cancellations will limit highway gasoline demand (a reduction of 250,000 barrels per day) and Jet fuel demand (down 60,000 barrels/day), cold weather and power outages will offset heating demand for liquefied petroleum gas (up 80,000 barrels/day) and diesel generators (up 200,000 barrels/day). The effects on supply and demand are mostly offsetting and temporary, reversing the risk of a rebound in oil prices this week.
Just after the U.S. crude oil market was cut off, the market recently revealed that Saudi Arabia and Iraq are ready to increase production, and the Biden administration is in contact with Iran and is expected to lift sanctions on Iran. Biden’s philosophy before taking office was to gradually engage with Iran and Venezuela�Rilla and gradually lift sanctions on the two countries, and now the Biden administration is gradually implementing the first step plan.
Similar scenes remind us of Trump’s sudden announcement to suspend sanctions on Iran in October 2018 in order to suppress oil prices. At that time, oil prices exceeded $80 per barrel during the National Day holiday. However, as Iran’s production capacity continued to be released into the market, crude oil prices fell rapidly from above US$85/barrel, and finally fell to around US$50/barrel in three months.
The reason why the market is so panicked is because Iran has huge crude oil production capacity. Iran’s current crude oil production is less than 2 million barrels per day, and its normal production capacity is around 4 million barrels per day. Once the sanctions are lifted, it will be a huge blow to the tight supply situation that Saudi Arabia has managed to maintain.
Reviewing the last two oil prices above US$70/barrel
The current oil price has risen to a maximum of over 65 US dollars/barrel. If we continue to launch an upward attack, the next target of Brent oil price will be 70 US dollars/barrel. What is the concept? After the attack on Saudi oil facilities, the market briefly reached around US$72/barrel, but did not stabilize; when the Iran issue broke out, the price briefly reached US$71/barrel, but did not stabilize. What is the market situation like these two times when oil prices hit US$70/barrel?
On September 14, two important oil facilities in Saudi Arabia were attacked. The Saudi Energy Minister stated in a statement issued by the official Saudi Press Agency that the attack “resulted in the temporary shutdown of the Abqaiq and Khurais plants.” Discontinued”. He also added that this will result in nearly half of oil production being cut, with production cuts as high as 5.7 million barrels per day. This is a very huge supply disruption! As time goes by, the impact of the incident gradually becomes clear. It will take several weeks for Saudi Aramco to return all production capacity to normal levels, but most production capacity can be restored within a few days. They said Aramco may consider declaring force majeure on some international shipments if it takes weeks to restore full Abqaiq production capacity.
After the incident, oil prices surged sharply at the opening of trading on September 16, with Brent crude oil reaching a maximum of $71.88/barrel, and WTI crude oil instantly rising to $63.34/barrel. The increase was close to 20%! This is very rare in history. However, in the following days, the market gradually cooled down, and Brent prices returned to the range of US$50-60/barrel.
On December 27, local time, a US military base in Kirkuk, Iraq, was attacked by at least 30 rockets, killing one US civilian contractor and four US soldiers. , 2 Iraqi security forces soldiers were injured. Afterwards, no organization or institution claimed responsibility for the attack, but US officials said that the armed organization “Hezbollah Brigade” linked to the “Quds Force”, an elite force of the Iranian Revolutionary Guards, was behind the attack. On December 29, the United States carried out “precision defensive strikes” on multiple military facilities of the “Pro-Iran” Shiite paramilitary organization “Hezbollah Brigades” in Iran. “Hezbollah Brigades” stated that the attack killed at least 25 members and injured 55 others.
The short-term sharp deterioration in U.S.-Iran relations has triggered endless imagination in the market. Geopolitics has once again become a key factor affecting oil prices, which has pushed oil prices above US$70 per barrel. However, after four days of games between all parties, the information gradually became clear, and the market assessed that the possibility of the U.S.-Iran conflict continuing to worsen significantly was reduced. Market risk aversion has subsided from the high level of excitement, gold and silver prices have fallen sharply, and oil prices have also continued to fall from highs. Finally, oil prices went out of a new round of decline.
It can be seen from these two incidents that neither Saudi Arabia’s supply cutoff nor Iran’s geopolitical events have been able to control The price remains above US$70/barrel. Therefore, US$70/barrel is destined to be a relatively large resistance for this round of oil price upward trend. Although the difference is that the current global macroeconomic “water release” is relatively serious, it has not led to a rapid improvement in demand. If macroeconomic forces promote the cooperation between the supply side and the demand side, the crude oil market will perform well, but the current demand side will only be temporarily supported. Without it, it will still be difficult for oil prices to quickly break through 70 US dollars per barrel. (Author’s unit: Haitong Futures)</p
