This week, crude oil prices continued to plummet, with BRENT and WTI both hitting their lowest points in 17 years. Domestic energy and chemical commodities are even weaker than they are today. A lot of talk suddenly emerged in the market that 20 US dollars/barrel is not the bottom. Some institutions even dropped the price of crude oil to below 20 US dollars/barrel. Panic can no longer be concealed.
We have analyzed several plummets in crude oil prices in history. The financial crisis in 2008 and the “war” between oil-producing countries in 2016 were the most terrifying. Among them, crude oil prices formed a sharp decline in 2008. There were six consecutive negative events at the monthly level, and the price plummeted by more than $100/barrel; in 2016, there was a rare seven consecutive negative events at the monthly level, and the price plummeted by more than $80/barrel.
The main reason why crude oil prices plummeted in 2008 was that there were serious problems on the demand side. The severe economic downturn led to corporate bankruptcies and stagnant production. Similar to the current epidemic, the economic development of various countries has been restricted and production and life have come to a standstill. The main reason why crude oil prices plummeted in 2016 was that vicious competition among oil-producing countries led to a serious excess on the supply side. Demand was unable to keep up with supply, which directly brought down the price system for a long period of time. Currently, against the background of the collapse of the OPEC+ production reduction agreement, the price war between oil-producing countries has broken out again, and the supply side is once again facing a serious surplus situation. So now we understand why the current crude oil price can fall below the previous low and hit the lowest level in the past 17 years. The double blow of the “2008 situation” and the “2016 situation” directly caused the price system to collapse.
Comparison between macroeconomics and the 2008 financial crisis
During the financial crisis in 2008, as various economic data declined one after another and companies faced large-scale bankruptcies, the demand for crude oil was greatly affected. It was precisely because of the sharp decline in demand that the crude oil The price fell rapidly from a maximum of US$147.5/barrel to US$36.2/barrel, a drop of more than 75%, forming a rare six consecutive negative conditions at the monthly level. At the same time, the financial crisis also dealt a huge blow to the global financial system. Stimulated by various countries around the world, it took several years for the global economy to finally come out of the trough.
By analyzing various data from the 2008 financial crisis, we can find that the financial crisis caused huge damage to the economies of various countries around the world. The OECD leading indicators have shown a cliff-like decline in just one year, especially in the United States, which has a huge economy and more complex financial assets. By analyzing the Citigroup Economic Surprise Index, we found that the situation of traditional developed economies was relatively pessimistic during this impact, with the Economic Surprise Index falling directly from around 0 to -200.
Faced with such a crisis, central banks and finance ministries of various countries have made every effort to rescue the market, and target interest rates have been significantly lowered. Among them, Japan and the United States have lowered their interest rates to close to 0. In terms of fiscal policy, each country is doing its best, and China’s 4 trillion economic stimulus policy has underpinned the global economy. Of course, the most sensitive indicator for macro-crisis is the stock market of various countries. In 2008, whether in the Americas, Europe or Asia, global stock markets plummeted one after another, and panic severely suppressed various financial assets.
Looking back at the current economic environment, although various indicators have not yet shown the level of crisis as in 2008, judging from the performance of the stock market, speculators have already considered the current situation Marked the 2008 financial crisis, which was even more panic than the 2008 financial crisis. Judging from the Dow Jones Index, during the financial crisis, the Dow Jones Index fell for three consecutive months, with the largest cumulative decline during the period exceeding 50%. Now, in just one month, the Dow Jones Industrial Average has fallen by more than 30%, and there have been several stock market circuit breakers that were not seen in 2008. The same is true for the British stock market. During 2008, the maximum decline in three months was more than 40%. Now it has fallen by 30% in just one month, which is enough to show the level of panic in the financial market.
Central banks around the world are currently facing the same crisis situation as in 2008. They have cut interest rates and required reserve ratios to release liquidity and try their best to prevent major crises in the financial market. Take the Federal Reserve as an example. On March 16, the Federal Reserve urgently announced an interest rate cut of 100 basis points to a range of 0-0.25%, completely releasing all monetary policies. At the same time, the Federal Reserve also announced that it would restart unlimited QE and inject a large amount of liquidity into the market. But the current trend of the U.S. stock market tells us how desperate the market is. The U.S. stock index has set a new record for the fastest circuit breaker in 30 seconds…
So looking at the stock market alone, the market’s expectations are higher It is more pessimistic and more intense than in 2008. If the epidemic is not controlled for a long time, it is certain that the impact on the macro economy this time will be greater than that in 2008. Fortunately, thanks to the efforts of various countries to rescue the market, the financial market has remained stable for the time being. If governments of various countries can strengthen their confidence and unite to fight the epidemic, and the epidemic can be effectively controlled in the near future, then market confidence will recover faster than during the financial crisis.
Therefore, the development path and direction of the epidemic will greatly affect the stability of the financial market, and will also determine the recovery time of crude oil demand, which is expected to affect the final trend of prices.
Compare fundamentals with history
Macroeconomic crises mainly affect demand from the perspective of demand As for the price trend, we can better understand the logic behind the plummeting price through fundamental analysis. Especially between 2008 and 2016, the logic of the price decline led by the demand side and the price decline led by the supply side are essentially different, but their impact on prices is extremely unified.
From the perspective of supply and demand in 2008, there was a serious decline in the demand for crude oil. At the same time, OPEC also began to reduce production in response to low oil prices, but the overall supply and demand balance sheet still showed that supply exceeded demand. pattern, crude oil inventories also showed a significant increase, which is the most essential factor for the price decline. From another perspective, the crude oil inventory-to-consumption ratio and the supply-demand gap also show an extremely pessimistic trend (the right axis is in reverse order), and prices have fallen sharply amid the macro crisis and serious imbalance between fundamental supply and demand.
From the perspective of supply and demand in 2016, there were no obvious variables on the demand side, and the overall growth momentum was relatively good. However, the sharp rise in the supply side completely defeated the price logic, especially U.S. shale oil and OPEC are competing to increase production. From the perspective of the supply and demand balance sheet, the large increase in supply has caused a serious oversupply in the market, and the degree of oversupply is more serious than in 2008. This can be clearly seen from the U.S. commercial crude oil inventories and OECD crude oil inventories. In 2016, the market was even discussing the possibility of global crude oil inventories expanding, which is enough to show the extent of the oversupply situation. Of course, the crude oil inventory-to-consumption ratio and the supply-demand gap also show an extremely pessimistic trend (the right axis is in reverse order). This pessimistic expectation is even more serious than in 2008.
Currently, with the OPEC+ negotiations breaking down, an angry Saudi Arabia insists on starting a global crude oil share war. Especially at this time when the global epidemic is spreading, the global macro economy is facing the same situation as in 2008. dangerous situation. Because the price decline is more rapid and violent this time, the cost logic of oil-producing countries is difficult to reflect at the supply level in a short period of time. We saw this week that the EIA announced that U.S. crude oil production continues to remain at a high level.
However, as prices have fallen to lows, the cost ends of various oil-producing countries have been unable to support them. There is news that the United States has proactively contacted Saudi Arabia and Russia, hoping to reach a consensus on production reductions. After experiencing the huge crisis in 2016, shale oil finally started to take action, so we do not rule out the possibility that the OPEC+ alliance will become a global production reduction alliance in the later period.
Under the current low oil prices, macro crisis is the main logic affecting prices. As long as the epidemic is not effectively controlled, there will be a steady stream of pressure on crude oil prices. Before the current market has formed an effective production reduction logic, the crude oil market will be difficult to get out of the bull market. The WTI crude oil April contract broke through the $20/barrel mark at the closing moment of the last trading day, showing the market’s pessimistic expectations. However, the absolute price of crude oil has fallen from high to low after all, and it has strong strategic reserve value in the long term. Therefore, we recommend that some customers with the ability start to consider strategic buying in batches, but for more short- and medium-term operations, For investors, with daily fluctuations easily exceeding 5%, it is recommended to be cautious in operations.
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