Last Friday, international crude oil prices plummeted by more than 9%. ICEBrent, the benchmark oil in the western region, closed at US$45.5/barrel, and WTI closed at around US$41.5/barrel; DMEOman in the eastern market closed at US$45.22/barrel, and Dubai was at US$44.55. . Brent-DubaiEFS reached a new recent low near $0.1.
Picture: Dubai/Oman and Brent-DubaiEFS trends
Data source: Reuters
After the fermentation of Saudi Arabia’s crazy “water release” news over the weekend, oil prices suffered another setback in early trading in Asia today. Crazy selling, Brent and WTI once fell more than 30% at the opening.
Data source: Wenhua Finance
Before the OPEC+ ministerial meeting last week, Saudi Arabia has proposed cutting another 1.5 million barrels per day and extending the production cuts until the end of this year. This proposal was agreed by OPEC and most non-OPEC members. Russia has not made a clear position. According to past “practice”, Russia Production cuts are usually agreed to at the last minute. Against the backdrop of demand being hit by the epidemic, the market has high expectations for an agreement at this OPEC+ meeting. However, the final result of Friday’s meeting disappointed the market. It was called the worst OPEC+ meeting in history. Russia rejected the proposal to deepen production cuts and was only willing to extend the existing agreement that was originally scheduled to expire at the end of March. In response to the Saudi-led OPEC decided to lift all restrictions on its own production, which means that the production reduction agreement that began in January 2017 officially ended, and the production of all parties will no longer be restricted after April 1.
Attachment: Review of previous OPEC+ production reduction agreements: On November 30, 2016, the OPEC+ meeting agreed to reduce OPEC crude oil production by approximately 1.2 million barrels per day (to 32.5 million barrels per day), Russia and other non-OPEC alliances have reduced production by 600,000 barrels per day, and the baseline for production reduction is the output in October 2016. This production reduction plan officially came into effect on January 1, 2007, and can be extended for another 6 months depending on market conditions.
Picture: OPEC’s first round of production quota reduction
2017 At the May meeting, OPEC+ decided to extend the production reduction agreement by nine months to March 2018. At that time, U.S. shale oil production had begun to recover.
In November 2017, OPEC+ decided to extend the production cuts to the whole of 2018. In May 2018, U.S. President Trump announced that he would withdraw from the Iran nuclear deal and impose sanctions on Iran. He also required buyers to significantly reduce their purchases of Iranian crude oil in the next six months and obtained exemptions to continue purchasing thereafter. Concerns about supply shortages caused Brent crude oil prices to briefly break through the $80 mark in early May. At the June 2018 meeting, OPEC+ decided to restore the implementation rate of production cuts to 100%. From April to May, the OPEC production reduction implementation rate was about 150%. At the end of 2018, OPEC+ reached a new production reduction agreement and began to reduce production by 1.2 million barrels per day in January 2019. The production reduction benchmark is the production level in October 2018.
Picture: OPEC+ deepens production quota reduction
In December 2019, OPEC+ decided to deepen it again Production is reduced by 500,000 barrels per day, of which OPEC production is reduced by 370,000 barrels and non-OPEC production is reduced by 130,000 barrels. In addition, Saudi Arabia will voluntarily reduce production by an additional 400,000 barrels per day, bringing the scale of production reduction to 2.1 million barrels (120+50+40).
The market has various speculations and interpretations as to why Russia refused to deepen production cuts in the context of a sharp decline in demand, which I will not elaborate here. For the OPEC+ production reduction alliance, the share of production cuts in the past three years has been basically offset by the increase in production of non-OPEC+ countries represented by the United States. The crude oil market is not short of oil. Without the epidemic, the market itself will be slightly surplus in the first quarter, and when demand encounters Against the background of the severe impact of the epidemic (Goldman Sachs’s previous report was 2 million barrels+ in the first half of the year, and now it seems that the amount will be increased), no party is currently willing to compress supply, and periodic oversupply will dominate the crude oil market.
Picture: OPEC’s production reduction is basically filled by the increase in US oil
The current test facing the market is that when output is completely unrestricted, a new round of price war has begun in advance. After delaying pricing, Saudi Aramco slashed its April OSP on Saturday to entice refiners to buy its crude, taking direct aim at Russia. Taking Arablight oil as an example, the price sold to Asia in April was reduced by US$6/barrel (a discount of US$3.1 to the average price in Dubai and Oman), and the price sold to the United States was reduced by US$7/barrel (a discount of US$3.75 to the ASCI index). ), sales to Europe are reduced by US$8/barrel ($10.25 discount to Brent).
Not only that, according to people familiar with the matter, Saudi Arabia has privately told some market participants that if If necessary, it could significantly increase production. Saudi Arabia’s current output is around 9.7 million barrels per day, and reached a peak of around 11 million barrels in 2018. If idle production capacity is added, the output can easily reach 12 million barrels per day. Taking into account the increase in production of other OPEC members, The short-term increase can exceed 1 million barrels. The result of quantity competition is self-evident. Before demand starts, oil prices will reach equilibrium at a lower price. Looking forward, there will be multiple possible combinations of the evolution of market supply and demand conditions after the second quarter, which also makes predicting oil price trends more complicated. On the supply side, one scenario is that a sharp drop in oil prices forces Russia and Saudi Arabia to return to the negotiating table to reach a new production reduction agreement. Although traditional oil fields in Saudi Arabia and Russia can still obtain positive cash flow at prices below US$20, from the perspective of fiscal breakeven, prices below US$45 will still cause serious fiscal deficits for both parties. Long-term low prices are both A losing situation. After the meeting that day, the OPEC Secretary-General stated that more informal meetings on the proposed production cuts will be held in the coming weeks, and OPEC+ may have another consultation before April (according to some media reports, it may be March 18). We speculate that under the current circumstances, both parties must make concessions before reaching a new agreement, which means that even if a new agreement is reached, the scale of production reduction will be less than 1.5 million barrels. Under this scale of production reduction, crude oil inventories are still likely to increase in the first half of the year. Second, no agreement was reached before April, and all parties continued to wait until the parliament in June for consultations. If countries begin to freely increase production after April, some high-cost oil will be squeezed out of the market. Considering the short-cycle, high-debt industry characteristics of U.S. shale oil and the relatively high production costs (well drilling costs are low, well completion and The cost of maintaining production is high), and production may be most vulnerable to shocks. In this case, oil prices drop below the operating costs of shale oil producers (understood as the cost of maintaining positive cash flow after taking into account hedging factors) to force U.S. oil to cut production. Considering the response time of production to oil prices, we may not see U.S. oil production begin to gradually decline until the second half of the year. In this case, oil prices will remain more depressed throughout the first half of the year, and may further drag down price performance in the third quarter. .
From the demand side, thanks to strong prevention and control efforts, China The COVID-19 epidemic was basically controlled in less than two months. As domestic work resumed gradually, domestic consumption of refined oil products gradually recovered. Currently, the diesel inventory in Shandong refineries has dropped to a low level, and the pressure on gasoline clearance has basically been lifted. It is reported that local refineries have begun to increase production load, and may increase it to 70% by the end of March. For Chinese refiners, the current low prices are a good opportunity to stock up on oil. In the context of the current downturn in the tanker market, even if there is insufficient onshore storage capacity, it may be relatively cost-effective to rent a VLCC for use as a floating warehouse. From a global perspective, the current epidemic is still in the stage of accelerating its spread. The global spread will have a wider impact on crude oil demand. It is still unclear whether the virus will disappear on its own in the summer, but from the early reports of the three major institutions Judging from the balance sheet, the impact of the epidemic on crude oil demand in the second half of the year has been significantly weakened. In the absence of an OPEC agreement, it is still not easy to rely solely on the recovery of demand to promote destocking.
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