Since the Spring Festival, international oil prices first fell and then rose, and the overall trend is relatively in sync with the pace of the epidemic in China. Oil prices fell sharply when new cases increased rapidly, and then bottomed out and rebounded after the growth rate of new cases slowed down. The decline was mainly due to reduced demand due to the epidemic. There are still potential long and short factors that will continue to ferment in the later period: the accelerated spread of the international epidemic has put financial markets and oil prices under pressure again; OPEC may expand production cuts and U.S. sanctions may cause Venezuela to further reduce production, which are potential bullish factors in the future.
The epidemic situation in China has improved significantly. The number of new confirmed cases in China has dropped to a low level, and the total number of cases and the number of people under medical observation continues to decrease. Anti-epidemic drugs, vaccine research, and plasma therapy have made progress. The demand side is also continuing to recover: the passenger flow of the Ministry of Transport continues to rise from the low level, and the coal consumption of the six major power plants and the transaction area of commercial housing in major cities have begun to recover. However, we still need to pay attention to the possibility of secondary spread due to the resumption of work and the return of international epidemics.
The international epidemic is accelerating its spread. The cumulative number of confirmed cases in Japan and South Korea is increasing rapidly. Most of the outbreaks in Japan came from the Diamond Princess cruise ship in the early days, and the number of cases in South Korea increased by hundreds every day. The number of infections in Italy and Iran is also increasing and is expected to spread to other countries in Europe and the Middle East. Although there are less than 100 confirmed cases in the United States, influenza has killed nearly 10,000 people this season, some of whom have shown signs of COVID-19. The current overseas epidemic is still in its early critical period. If it can be well controlled in the near future, it will have limited impact on the financial market; if poor control leads to a large outbreak of the epidemic, the adverse impact on the economy will increase, and oil prices will come under pressure again.
Figure 1: The trend of oil prices since the Spring Festival is highly correlated with the rhythm of the epidemic
The decline in demand is a foregone conclusion, pay attention to changes in OPEC production
The epidemic has reduced demand for oil products. Seventy percent of China’s demand for refined oil products comes from transportation. COVID-19 has caused passenger traffic to decrease by about 40% in the early part of the Spring Festival. If the bimonthly recovery continues, the impact on annual oil product demand will be about 320,000-350,000 barrels per day. After the outbreak, the three major international energy agencies EIA, IEA and OPEC lowered global demand in 2020 by 310,000, 380,000 barrels/day to 100, 830,000 barrels/day, respectively. However, they all stated that this forecast has a large impact. Uncertainty.
Supply regulates demand pressure. The pressure of falling demand caused by the epidemic requires supply cuts to offset. The production cuts mainly come from OPEC countries. In January, civil war in Libya led to the closure of domestic oil fields, reducing production by 900,000 barrels per day. In March, OPEC held a meeting to discuss expanding production cuts by 600,000 barrels per day. U.S. sanctions on Russian oil subsidiaries in May may lead to a further reduction in Venezuelan output by 1.5 million barrels per day. If fully realized, it will result in a production drop of approximately 2 million barrels per day.
Inventory changes depend on the degree of supply and demand hedging. Market demand for OPEC crude oil (global demand – non-OPEC supply) can be used to project inventory changes. The market demand for OPEC crude oil in 2020 is estimated by EIA, IEA and OPEC to be 2929, 2845 and 28.7 million barrels per day respectively. OPEC’s actual output in January was 28.86 million barrels per day. In February and February, it may drop to 28.35 million barrels per day due to Libyan production cuts. In March, if the production cuts are expanded, it will drop to 27.75 million barrels per day. In May, if the US sanctions are fulfilled, it will drop to 27.25 million barrels. /day. If all are cashed out, there will be a slight destocking, and it is still necessary to continue to track changes in OPEC’s output policy. (Author’s unit: CITIC Futures)
Figure 2: Assessment of the impact of the epidemic on the oil market by the three major international energy agencies
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