In March, crude oil prices suffered their largest single-month decline in history.
This spring was extremely bleak for the crude oil market. Although the cumulative weekly increase of WTI crude oil futures in the week just ended reached 31.8%, which is the largest weekly increase in the history of the contract, due to the low base, this range is still far behind the decline in March. Data shows that Shanghai crude oil futures fell by 24.95% in March, Brent oil fell by 48.25%, and US oil fell by 55.59%. The reason is closely related to the recent double kill of supply and demand in the crude oil market.
On the demand side, the COVID-19 epidemic continues to spread around the world, causing a sharp decline in global crude oil demand. Crude oil traders expect crude oil demand to decrease by 10 million to 20 million barrels per day from March to April. Goldman Sachs expects crude oil demand to decrease by 10.5 million barrels per day in March and 18.7 million barrels per day in April. Russian Energy Minister Novak expects global crude oil demand to fall by 10 million to 15 million barrels per day. Citigroup expects crude oil demand to shrink by 11 million barrels per day in the second quarter. IHS expects crude oil demand to shrink by 14 million barrels per day in the second quarter. Vitol predicts that crude oil demand in April may decrease by up to 30 million barrels per day… No matter what the final value is, the drop in demand of more than 10 million barrels is already the largest in history.
On the supply side, the OPEC+ production reduction alliance has broken down. Saudi Arabia has frequently stated that it will increase crude oil production. Russia has also stated that it is ready to deal with low oil prices. Crude oil prices are experiencing a double destruction of supply and demand. situation. Therefore, we see that when the U.S. stock market falls, crude oil prices fall sharply, and when the U.S. stock market rises, crude oil prices remain weak.
The current low oil price level has made most oil-producing countries miserable, especially recently when US President Trump successively called Russia and Saudi Arabia and once again used the powerful ” Big Mouth” supported the upward price movement. On the issue of low oil prices, the United States seems to be more impatient and has more motivation to promote the implementation of the production reduction alliance.
In addition, from the perspective of global financial asset performance, the decline in crude oil prices in March far exceeded that of others. After all, in addition to paying attention to changes in macro trends, commodities also pay attention to their own commodities. Attributes. Crude oil prices have fallen sharply under the pressure of both supply and demand. Therefore, we must wait until there is a significant improvement on the supply side or the demand side before prices can have a significant upward momentum.
The United States is expected to become the promoter of the global production reduction alliance
In my impression, in 2016, U.S. shale oil showed great resilience like an “unbeatable little power”. Even though crude oil prices fell sharply at that time, oil-producing countries led by Saudi Arabia still did not It can nip it in the cradle, but in the next few years, it will continue to reduce production to give up its share to shale oil, and the crude oil production in the United States will continue to hit new highs.
However, as the epidemic continues to ferment, especially when the United States is currently struggling with the epidemic, Saudi Arabia and Russia, who seem to be at odds with each other, seem to be standing on a united front, trying to The United States has also joined the production reduction alliance, and the plot has changed rapidly, a bit like the Sun-Liu alliance jointly resisting Cao. Two weeks ago, we predicted that the OPEC+ production reduction alliance would transition to a global production reduction alliance. At present, the possibility of implementation is quite high.
On Thursday night, Trump, the long-dormant “best trader”, once again used Twitter to “dictate oil prices.” Trump said that Saudi Arabia and Russia will jointly reduce production by 10 million to 15 million barrels per day! Crude oil prices soared 40% instantly after hearing the news. It can be seen that Trump has frequently called Saudi Arabia and Russia in the past few days. It seems that the United States is really anxious on this issue. If the United States can participate in the production reduction alliance, then other oil-producing countries will most likely will participate, and the global production reduction alliance will also be launched.
The reason why the United States is anxious is inseparable from the recent large-scale outbreak of the epidemic and the pressure to maintain financial stability. As low oil prices continue, shale oil producers that have always relied on borrowing not only have to endure the pain of selling at a loss, but also have to find ways to pay their due debts. Once there is a problem with debt repayment, shale oil producers will enter Period of mass bankruptcies. If a wave of bankruptcies of oil companies occurs, it will greatly affect the financial order of the United States, and the operation of maintaining financial stability in the United States will become more difficult.
Judging from various indicators, developed countries led by the United States are enduring the possibility of a sharp economic decline. Although the central banks of various countries have taken the initiative to cut interest rates to release huge amounts of liquidity, their support for the economy is not obvious. The main reason is that the impact of the epidemic on the economy is all-round and goes deep into the bottom layer. No matter how much liquidity is released, it will not be affected by the shutdown of production and work. It is also difficult for the economy to improve significantly. Therefore, despite the global flood, the stock markets and crude oil prices of developed countries have not rebounded significantly.
From the perspective of the epidemic, the development of the global epidemic is still not optimistic, and the same is true for the United States. Whether it is the cumulative number of confirmed cases or the number of new cases on that day, they are all showing an exponential growth trend. The number of new cases in the United States that day was close to 30,000. It is too early to talk about an inflection point, at least until the new coronavirus outbreak.�A conclusion cannot be drawn until the second derivative of the confirmed curve is not positive. Therefore, the impact of the epidemic on oil prices still exists.
In this case, it is not easy to determine how long crude oil prices will remain low. At least in the short term, it will be difficult to rise back to near the production cost of shale oil. Shale oil will continue to Living with the pain of low oil prices. It can be seen from the number of drilling rigs that the recent plunge in prices has also caused a sharp decline in the number of drilling rigs, but this has not been reflected in short-term crude oil production. It can be seen that under low oil prices, whether it is market behavior or human intervention, U.S. crude oil production will most likely decline.
Therefore, the United States is actively seeking cooperation in reducing production at this time. First, it can increase crude oil prices as soon as possible and maintain domestic financial stability. It will also help domestic shale oil producers to start from To get out of a loss-making situation, it will not lead to a large-scale bankruptcy wave. Second, natural production reduction and artificial production reduction have the same effect, so why not do it? By participating in the global production reduction alliance, the influence of the United States will replace Saudi Arabia and Russia to a certain extent, which will be more beneficial to the United States in controlling oil pricing power. We predict that this round of price collapse is likely to form a production reduction alliance driven by the United States, and participants will include the world’s three largest crude oil producers.
Despite expectations, the market risks are still considerable in the short term, resulting in a deviation between expectations and reality. Oil prices will continue to fluctuate between expectations and reality in the short term. Move forward in confusion. First of all, there is still considerable resistance to the global production reduction alliance. This can be seen from the signs that after Trump’s tweet, Saudi Arabia, Russia and other US officials came to undermine it. Saudi Arabia said that the current best scenario is to reduce production by 6 million barrels per day. It is not sure how Trump obtained the previous data, nor is he sure which countries in his mind will join the production reduction. Regarding the reduction of 10 million barrels per day and above, The statement is an exaggeration. The United States is unable to coordinate mandatory domestic oil supply cuts and U.S. President Donald Trump has no plans to ask domestic oil producers to agree on specific production cuts, senior U.S. officials said.
As crude oil prices plummet, the monthly difference trend suggests that U.S. and global crude oil inventories will grow significantly. The recent API data and EIA data exceeding expected growth of more than 10 million barrels per day are the best reminder. In addition, some institutional research claims that if current market supply and demand levels are followed, global crude oil inventories will be completely filled from May to June. Therefore, in the short term, we still need to pay close attention to the inhibitory effect of the sharp increase in U.S. crude oil inventories on prices.
Under low oil prices, Saudi Arabia and Russia take it calmly
Russia and Saudi Arabia do not seem to be in a hurry about low oil prices. Saudi Arabia has threatened to abandon the production reduction agreement in April and significantly increase crude oil production to more than 10 million barrels per day. Russia has also been relatively calm on this issue, refusing to negotiate production cuts within the traditional OPEC+ framework and claiming to be ready to deal with low oil prices.
Now that the United States is actively seeking to cooperate with Saudi Arabia and Russia to reduce production, we believe that Saudi Arabia and Russia will take the opportunity to ask for prices from the United States, including requiring the United States to assume more production reduction tasks, and the United States to lift Russia’s part Sanctions, etc. Now Saudi Arabia and Russia are on the same front. Therefore, we can also imagine that the resistance to global production cuts is huge this time, but as long as production cuts are still being discussed and there are expectations for production cuts in the market, prices can rise from the current bottom range.
This Friday afternoon, there was news that OPEC+ will hold an emergency video conference next week to discuss countermeasures for the crude oil market. It seems that Trump’s call has played a big role. role. A Wall Street Journal reporter said that if the United States does not join in the production cuts, Russia is unlikely to agree to cut crude oil output, and OPEC+ is expected to discuss a production cut of at least 6 million barrels per day. According to satellite news sources, OPEC will discuss cutting production by 10 million barrels per day at next week’s meeting, and some new countries hope to join the OPEC+ organization. No matter how much production reduction is ultimately achieved, as long as new countries, including the United States, can join the production reduction alliance, it will be a big stimulus for oil prices. At least it shows that the global supply side will be able to stabilize oil prices. With certain efforts, the “prisoner’s dilemma” problem of OPEC+ production cuts from 2016 to 2019 has been perfectly solved.
Therefore, in the short term we must pay close attention to the progress of next week’s OPEC meeting. Affected by optimistic expectations, crude oil prices rebounded sharply this week. If the United States and other countries can join the negotiations to reduce production, the support for oil prices will be stronger, and there is still room for oil prices to continue to rise in the short term. In addition, we need to continue to pay attention to the unexpected accumulation of U.S. crude oil inventories. If the production reduction meeting goes smoothly, then the bulls will most likely ignore the expected accumulation of inventories. If the production reduction meeting has large differences, then the accumulation of inventories will This behavior will continue to suppress crude oil prices.
In the medium term, we still have to pay attention to the fermentation of overseas epidemics and the recovery of demand. If the demand side continues to be sluggish for a long time, even if production is reduced, it will Limit the upside of crude oil prices. However, judging from the current situation, we still believe that WTI 20 US dollars/barrel and SC 210 yuan/barrel will be the bottom range of this round of oil price decline. As for when prices can get rid of the current low, it depends on the efforts of the supply side. and demand-side recovery.
If there are large differences in the discussion, then the accumulation of storage will continue to suppress crude oil prices.
In the medium term, we still have to pay attention to the fermentation of overseas epidemics and the recovery of demand. If the demand side continues to be sluggish for a long time, even if production is reduced, it will Limit the upside of crude oil prices. However, judging from the current situation, we still believe that WTI 20 US dollars/barrel and SC 210 yuan/barrel will be the bottom range of this round of oil price decline. As for when prices can get rid of the current low, it depends on the efforts of the supply side. and demand-side recovery. </p
