In March, the crude oil market is about to usher in the two-day OPEC+ meeting in Vienna. Currently, the global economy is in a precarious position due to the impact of the COVID-19 epidemic. Based on concerns about a sharp decline in crude oil demand, international crude oil prices have fallen sharply by 26.7% from the high reached on January 8. The previous decline once exceeded 30% on March 2. %.
Although the epidemic in China was under control in mid-February, the overseas epidemic has spread widely, which has made global crude oil demand worse. World Health Organization data shows that confirmed cases in South Korea, Iran, Italy, France and other countries continue to increase. The biggest risk of the spread of the overseas epidemic comes from the difficulty of prevention and control, so the risk of continued spread is very high. Judging from the development of the epidemic, it will have a major impact on the global manufacturing supply chain. Research by Morgan Stanley shows that China’s influence on the global industrial chain is still very important and difficult to replace. However, the current epidemic has tightened the industrial chain, and the epidemic situation in neighboring countries in the industrial chain also requires great attention, because local governments may not be able to replace it. We can take timely measures similar to China’s extraordinary containment measures. The impact of business shutdowns caused by the epidemic on the global supply chain is significant, and the impact on the global economy and trade cannot be ignored.
Returning to the fundamentals of crude oil supply and demand, as the epidemic spreads, global crude oil demand was the first to be affected and shrank significantly. Rystad predicts that if the epidemic breaks out in China and does not spread to other countries, global crude oil demand will drop by an average of 2 million barrels per day. Nearly three-quarters of the drop will come from the decline in Chinese demand, and the remaining drop will mainly come from Due to the decline in aviation demand and the impact of the epidemic on neighboring Asian countries. Considering that the epidemic has spread to Japan, South Korea, Europe and other regions, crude oil demand will fall even more, even exceeding the level when the SARS epidemic broke out in 2003. When the SARS epidemic broke out, China’s proportion of the global economy and global crude oil demand was much smaller than it is now. According to EIA data, in 2003, China’s daily crude oil imports were 1.8 million barrels. By 2019, China’s daily crude oil imports reached 10.12 million barrels.
From a country perspective, the epidemic has led to a decline in crude oil import demand from Japan and South Korea. Data show that South Korea’s crude oil imports in February decreased by 13.9% from the same period last year to 84.8 million barrels.
At present, the pace of resumption of work by Chinese companies has accelerated, but due to high crude oil inventories and low demand for downstream refined oil products, refinery operating rates have not yet returned to normal levels. From the supply side, only OPEC+ further expands the scale of production cuts to offset the impact of declining crude oil demand. The survey showed that OPEC’s implementation rate of production cuts was 128% in February and 133% in January. However, U.S. shale oil production has not declined. As of the week of February 28, the number of oil wells drilled online in the United States was 678, only one less than the previous week. The current reduction of oil wells in the United States will not lead to a decrease in production. On the contrary, the yield per unit area is continuously increasing.
On March 5, OPEC+ will begin a two-day meeting in Vienna. Russian Energy Minister Novak said that Russia is evaluating a smaller production cut proposed earlier by OPEC and its allies. proposal.
According to the CME Group’s OPEC Observation Tool, the probability that the OPEC+ meeting will maintain the original scale of production cuts is 72.05%, while the probability of expanding the scale of production cuts is 14.80%. From the perspective of trading strategy, if OPEC+ reaches an agreement to expand the scale of production cuts, then short-term crude oil may remain stable, because the recent rebound in crude oil is mainly based on the expectation that OPEC+ will expand the scale of production cuts. If OPEC+ does not reach an agreement to expand the scale of production cuts, then crude oil prices will Return to decline.
In terms of trading strategy, the author recommends shorting the NYMEX crude oil futures contract to hedge the risk of not reaching an agreement to expand the scale of production cuts. Even if OPEC+ reaches an agreement to expand the scale of production cuts, the crude oil market is just cashing in on the good news. Until the overseas epidemic stops spreading, the downward trend in demand will continue, inhibiting the room for a rebound in oil prices. CME Group’s energy products extended trading hours and reached record trading volumes, including WTI crude oil futures (CL), which accounted for 20.3% of total trading volume, and WTI crude oil options (LO), which accounted for 16.3%.
The picture shows the CME Group’s OPEC observation tool Calculated probabilities corresponding to the scale of OPEC+ production cuts
CME Group’s OPEC Watch tool uses NYMEX WTI crude oil option prices to calculate the probability of certain outcomes at the next OPEC meeting. The resulting probabilities are calculated based on the most recently expiring weekly and monthly options during the OPEC meeting. Investors and traders can use observation tools to better understand whether the latest probability of the OPEC meeting will achieve the expected results. </p
