Entering the third quarter, the marginal upside to crude oil demand exceeding expectations may gradually be limited. The expected release of Iranian production and the possible impact on the OPEC+ production reduction path under high oil prices will increase the risk of marginal downside to the supply side. Bullish funds are becoming increasingly cautious, and the trend may gradually turn into a high-level oscillation pattern. OPEC+ did not reach a substantive agreement this week, but the financial game in the oil market has significantly intensified. In addition to taking advantage of the sell-off caused by uncertainty on the supply side, it may also be a reflection of increased volatility in the context of high oil prices and limited upside.
The fundamental destocking expectations are clear but have been traded repeatedly
In terms of demand, the recent high growth rate of terminal oil product demand and its leading indicators have been confirmed one after another. As the epidemic in major European and American economies has been effectively controlled, and the epidemic situation in India has turned optimistic, global travel intensity has accelerated its rebound in June, superimposing the traditional driving season. Gasoline consumption is expected to hit a new high since the epidemic. High-frequency data tracking on flights shows that the number of security checkpoints at U.S. airports last week remained at a high since the epidemic, returning to -25% of the same period in 2019. The number of global commercial flights hit a new high last week since the epidemic, returning to -25% of the same period in 2019. 28% level. With the recent implementation of cross-border facilitation measures such as European vaccine passports, European flight volume will see significant growth in the future, and there are signs of recent active replenishment of jet fuel in Europe and the United States. In addition, the recent continued strengthening of terminal demand has not provided support for refining profits, and crack spreads in major regions around the world have been running weak. The key lies in the rapid increase in refinery operating rates, which to a certain extent has also increased the sustainability of crude oil demand growth at the refinery end in the later period. of hidden worries.
Global oil supply and demand balance It is estimated that
In terms of supply, the marginal volume will mainly depend on the OPEC+ agreement to increase production and the pace of Iranian crude oil release. The short-term market Attention has focused on the OPEC+ disagreements in the past week. Last Thursday night, the OPEC+ Joint Ministerial Supervision Committee once recommended increasing production by 400,000 barrels per day from August to December and delaying the expiration of the production reduction agreement from April 2022 to December. It seems that there is no disagreement among countries on increasing production from August to December, but the UAE insists that if the production reduction agreement is delayed, the production benchmark needs to be adjusted. For this reason, OPEC+ failed to reach an agreement and finally announced the cancellation of the ministerial meeting. Although the OPEC communiqué did not mention August production quotas and production reduction plans, as some OPEC representatives stated that the production reduction in August will continue to the July level, the market generally interpreted that there will be no increase in production in August, but with high oil prices and ample idle production capacity In the context of the emergence of incentives to increase production, OPEC+ differences have obviously raised concerns about disorderly release of supply.
Although there have been turmoils at this OPEC+ meeting, funds’ estimates of OPEC+’s later behavior are obviously biased towards caution. The new round of OPEC+ production reduction cycle that started in 2017 has continuously confirmed the discipline and effectiveness of the organization’s output constraints. Although there were differences during the period, the final resolution was in line with the established policy framework. The current broad framework of the OPEC+ production reduction agreement was reached in April 2020. As of July 2021, its production reduction has dropped from the original baseline of 23% to 15%. According to the monthly report released by OPEC in early June, the market’s response to OPEC’s The quarter-on-quarter increase in crude oil demand (Call on OPEC) in the third and fourth quarters was 1.57 million barrels/day and 730,000 barrels/day respectively. From a total perspective, it is roughly equivalent to the 2 million barrels/day increase from August to December. At present, Under the current oil price level, OPEC+ is committed to keeping a close eye on demand and increasing production, rather than forming a gap to help destock. The expected guidance is relatively clear. Although there is still uncertainty about the production increase quota in August, the current disagreement lies in the amount of production increase rather than whether to increase production. It is only a matter of time before the gradual production increase quota amount is determined. Based on the static balance sheet, a sharp slowdown in destocking in the second half of the year is inevitable, and the expected release of Iranian production brought about by the Iran nuclear deal will intensify supply pressure and may continue to impact the share battle among OPEC+ members.
The positive period has passed, so be cautious if you are too inertial to be bullish
In terms of trading rhythm, it is currently more important to pay attention to changes in the marginal volume of supply and demand. It is clear that demand is improving, but at present, due to the smooth progress of global vaccines, the pace of demand increase is more consistent with the market’s forecast at the beginning of the year. Oil prices rose significantly during the strong expected trading phase that started in November 2020. In May this year, oil prices entered the demand confirmation phase. Although prices remained strong, the increase slowed down. After entering the middle and late stages of demand confirmation, this bullish factor can have a positive impact on prices. Whether it can continue to support requires extra vigilance.
With OPEC+’s high implementation rate of production cuts, the confirmation of strong demand and the slightly difficult negotiations between the United States and Iran, which has led to the continued postponement of expectations for the release of Iranian crude oil, are the main reasons for the supply and demand side to support the rise in oil prices in the second quarter. . The U.S.-Iran negotiations have been put on hold recently. Iran will no longer extend the interim technical agreement with the International Atomic Energy Agency and increase the abundance of uranium. The market lacks relatively consistent expectations for the time when the agreement will be reached. It may be that the agreement will be reached within the third quarter. At a more pessimistic time, there is a high probability that the news about the Iran nuclear negotiations in the later period will be marginally negative. As OPEC+ canceled its meeting on Monday night, there is a possibility that it will not increase production in August. From a marginal volume perspective, no matter how OPEC+ plans to increase production in the future, there is a high probability that production will be the same or higher than this expectation.This also caused oil prices to show weakness after a brief push up.
In summary, although we still expect the fundamental data in the third quarter to confirm the demand for crude oil Marginal increases and continued destocking, but from a historical perspective, the inventory inflection point does not necessarily correspond exactly to the price inflection point. The current oil price has entered the high range after the shale oil revolution and OPEC+ has sufficient idle production capacity. In the context of bright demand-side data but unable to exceed expectations, and high potential risks on the supply side, high-level oscillation is more likely to be the model for oil prices in the later period. This week’s high volatility may have been a preview of supply risks. In a market environment where fear of high prices has emerged and there are relatively few positive surprises beyond expectations, there is still room for correction. However, we need to pay attention to the negative impact of OPEC+ members once again speaking out to support prices after continuous declines. feedback effect. </p
