Last week, Brent crude oil prices hit a top of $43.5/barrel, and then The market could not withstand the pressure from above and started a round of correction. This callback was also the first time it closed on the negative line after six consecutive positive weeks. After oil prices rebounded from the bottom, overseas crude oil futures prices have doubled, but there has never been a decent correction. Last week, the main SC crude oil contract closed down 6.63%, the main Brent crude oil contract closed down 7.2%, and the main WTI crude oil contract closed down 6.18%.
The main reason why crude oil prices have fallen so sharply is the assistance of the macro market. The speeches of the Federal Reserve and the U.S. Treasury Secretary last Thursday night overwhelmed the U.S. stock market. The sharp decline in U.S. stocks drove crude oil prices downward. However, Brent prices began to stabilize and recover after hitting $37/barrel, closing at $39/barrel. above. We believe that the downward trend in prices driven by the macro market is only a short-term behavior. Under the unlimited stimulus from the United States, the flood of liquidity has made it easy for financial assets to be “watered”. The future of oil prices depends on the intensity of the market’s long and short positions and the evolution of fundamentals. .
In short, oil prices are still in the low oil price range, and there is still room for upside in the long term. From a strategic assessment point of view, there are too many factors that will cause oil prices to escape from the low oil price zone. Therefore, if there is a larger adjustment at this time, it may be the last opportunity for low oil prices during the year. Therefore, we recommend that investors with long-term allocation needs pay close attention to market changes and developments in a timely manner, and entering the market at low price ranges for long-term holdings should result in good returns.
The U.S. market is still full of crises
The financial market suddenly became unstable last Thursday night: crude oil plummeted, US stocks plummeted, and the Nasdaq index, which had just hit a new high, was abruptly pulled down, and the 500-point drop in one day was wiped out. After all the gains in the past two weeks, crude oil bulls, who have always been unwilling to admit defeat, could not withstand the blow of the macro market. There was no resistance at all on the market and the price continued to fall.
The sudden fermentation of macro sentiment is mainly due to two reasons: First, the number of confirmed cases of new coronary pneumonia in 21 states in the United States has surged. Harvard University experts predict that there will be 100,000 cases in the next three months. People have died, but Trump insists on holding a presidential campaign rally next week, raising concerns that the epidemic will spread again on a large scale. Second, last Thursday night, the U.S. Treasury Secretary announced that he would continue to inject $1 trillion into the U.S. economy in the future to support economic recovery. The market was stunned. Isn’t the U.S. economy already on the road to recovery? Why is it still taking such drastic measures? So we saw a sharp plunge in U.S. stocks. In fact, the Federal Reserve also came to assist. The Federal Reserve announced that the zero interest rate policy will be maintained until 2022, which further aroused the market’s pessimistic expectations for the U.S. economy.
We cannot predict the direction of the U.S. stock market, but the game between expectations and reality will continue to drive its violent fluctuations. After injecting so much money, despite the obvious short-term price decline , but it is not ruled out that U.S. stocks can return to a rebound trend after the bad news is digested. But crude oil prices may not be so lucky. The correction that was supposed to occur was dragged down by the “buy, buy, buy” behavior of bulls and has been postponed indefinitely. Since the trend of U.S. stocks has broken this balance, crude oil prices are very likely to take this opportunity. A further correction will begin, waiting for the bulls to enter the market again after the market recovers.
EIA weekly and monthly data were released last week. The biggest highlight is the rapid rise in U.S. gasoline demand. In last week’s data, U.S. gasoline demand It has returned to 8 million barrels per day again, which is very close to the same period in history. As life in various parts of the United States gradually returns to normal and the resumption of production and work is gradually advanced, gasoline consumption is slowly picking up, and diesel consumption also rebounded last week. But as we said before, the market is now worried about the accelerated spread of the epidemic in the United States, and the true performance of demand is still unknown.
U.S. demand is extremely important for the recovery of global demand. The consumption base of U.S. refined oil products is huge, and the recovery of demand will help to significantly increase global crude oil demand. At the same time, the recovery of U.S. demand will also allow U.S. crude oil inventories to enter a rapid destocking stage, which is crucial for market rebalancing expectations. .
Judging from the inventory performance of refined oil products, gasoline and diesel inventories are still near historical highs, but what is more optimistic is that diesel inventories are showing signs of an inflection point. High inventories of refined oil products have also kept U.S. refinery profits at a low level, which has greatly limited the enthusiasm of refineries to start operations. Judging from the data on operating rates, last week’s data still maintained a weak rebound, and there was no major improvement overall.
U.S. crude oil inventories increased by more than 5 million barrels again last week, and the overall inventory level rose to a record high. It is too early to say that inventories have entered an inflection point. We can only wait patiently for the market to Clear further. However, the clear logic now is that if the inventory does not show a substantial turning point, there is a high probability that crude oil prices will not be able to substantially stabilize.The short-term gap means that Brent oil price returns to above US$45/barrel. Under this logic, in addition to OPEC’s production reduction policy, the turning point in U.S. data cannot be ignored. In terms of production data, crude oil production fell again by 100,000 barrels/day to 11.1 million barrels/day. At the current price level, although some shale oil manufacturers are preparing to restart production capacity, it seems that the natural clearing process is still not over. The supply side currently only has a positive effect on oil prices.
Fundamentals are still the main logic behind the rise in oil prices
In addition to the normal fundamental data of concern, some abnormal ways have also appeared in the impact of crude oil inside the factor. Last week, when oil prices faced a key adjustment choice, Libya announced that it had regained control of the oil fields and was expected to increase production by 1 million barrels per day in the future. Affected by this, crude oil prices also showed signs of imminent adjustment. Unexpectedly, the next day, Libya once again announced that its plan to increase crude oil production had failed due to militants reoccupying the area. Seeing this news reminds us of the oil tanker bombing incident, drone incident, and Saudi oil pipeline attack that surprised the market in 2018/2019.
In fact, Saudi Arabia has been doing better and better at managing crude oil prices, structures and expectations recently, and we do not rule out the possibility that crude oil will become a policy market in the future. The official price data released by Saudi Arabia over the weekend was significantly increased again. Of course, the spot price is indeed tightening on the one hand. If futures and spot prices go up, the official price will naturally also go up. But another purpose of Saudi Arabia is to create strong spot prices and then transform the forward curve through high discounts in the physical market. When crude oil prices were extremely low, the forward curve showed a deep Contango structure (the Contango structure is considered a short market). Saudi Arabia’s ultimate goal is to completely reverse the Contango structure into a Backwardation structure (the Backwardation structure is also considered a bull market). structure).
After the Backwardation, it will be beneficial to the bulls. It can also be regarded as a major reversal in the market structure and market sentiment. It will be simple for Saudi Arabia to push prices in the future. After Backwardation, it is actually a stage of passive destocking. Under the deep Contango structure, there are a lot of inventory arbitrage funds, resulting in high global inventories. After the structural change, the arbitrage space is completely “destroyed”, and oil hoarding is negative profits, so Those who have oil in their hands have to sell, which is reflected in the inventory structure that stocks continue to decline. Therefore, changing the structure of the forward curve is equivalent to changing the inventory structure. Judging from the recent changes in the forward curve, with the recent rise in oil prices, the curve is indeed flattening, but it has not yet reached the bottom of the reversal. A complete reversal requires the cooperation of the fundamentals and the macro level, and it does not happen overnight. .
Some Russian experts previously predicted that the crude oil gap in July will reach 5 million to 7 million barrels per day. This is definitely not a “talking” behavior, although we do not agree with this. Figures, but supply is definitely tight. The same is true for EIA’s market forecast. After the market implemented the production reduction policy in May, the market supply gap in June was approximately 2 million barrels per day. Starting in June, EIA predicts that the market will be in a long-term supply shortage process by the end of 2021.
So from a short-term market perspective, the fermentation of macro sentiment has triggered a short-term decline, but the decline process is not over yet. After Brent’s first test of $37/barrel in the short term, there will be more in the future. may continue to test the range of US$33-35/barrel. However, judging from Friday’s performance, the decline in oil prices is expected to continue. U.S. stocks have driven down oil prices amid pessimistic remarks and expectations. However, it is also true that the Federal Reserve continues to release water to stimulate the stock market. Flooding liquidity will make crude oil prices Downward momentum weakens. In the medium to long term, the logic that fundamentals drive prices upward is still in effect, and there is a high probability that there will be a supply shortage in the second half of the year. Therefore, we expect that after this round of correction, oil prices will still return to normal in the future if the demand side does not disappoint. within the general upward trend. </p
