2019 has just ended, and the risk of geopolitical conflicts in the crude oil world has reached a climax at the beginning of the new year. In the early morning of January 3, the U.S. military launched air strikes against two targets with ties to Iran. Later, Iraqi national television reported that the Baghdad Airport in Iraq was attacked. Three rockets landed near the Baghdad International Airport in the Iraqi capital. The explosion killed at least 8 people. Major General Soleimani of the Iranian Islamic Revolutionary Guards and Muhandis, commander of the Iraqi Popular Mobilization Forces, were here. Killed in an air strike. Iran’s Supreme Leader Ayatollah Ali Khamenei later said that after the killing of Major General Soleimani of the Islamic Revolutionary Guard Corps, “serious revenge” awaited the murderer of Major General Soleimani of the Islamic Revolutionary Guard Corps, which would double Iran’s determination to resist the United States and Israel. . As soon as the news came out, crude oil prices rose sharply in early trading, with the highest increase in oil prices in the three major regions of Brent, WTI, and SC reaching more than 4%! The geopolitical conflict once again comes to the C position, here I come! are you ready?
In the past December 2019, there was a steady slow bull market. Throughout the 21 trading days in December, Brent There were only 5 negative lines, but the overall increase this month was only 8.73%. The crude oil price rose in small steps without a correction, which surprised the market.
The reason why crude oil prices have come out of this slow bull market is due to the OPEC+ trend at the beginning of the month. Reaching an agreement to deepen production cuts is inseparable. After crude oil prices dropped several times, and against the background of declining demand caused by trade frictions, OPEC finally found the courage to once again extend and deepen its production reduction plan, which ultimately further solidified the bottom of oil prices and allowed investors to see the future. In response to the hope of the market, fund managers began to enter the market in large numbers and oil prices also experienced a counter-seasonal rise.
On the other hand, there are frequent reports of positive news from Sino-US trade negotiations, and the macro environment The improvement also laid the foundation for the strength of crude oil prices. But after the price has been in a slow bull trend for a full quarter, there are technically signs of overbought and top divergence. But in the medium term, at least in the first quarter of 2020, the performance of crude oil prices may not be too bad. In an environment of further tightening of fundamentals, crude oil prices are expected to repeat seasonal trends and rebound.
Fundamentals still provide upward momentum
Fundamentally, OPEC’s production cuts are still the main logic for future market trends. Against the background of declining demand, OPEC’s production cuts will give reassurance to prices next year. In the production reduction agreement last December, OPEC’s total production reduction was 1.2 million barrels per day. This time, the production reduction reached 1.7 million barrels per day. With Saudi Arabia’s voluntary additional production reduction of 400,000 barrels per day, the overall production reduction reached 2.1 million barrels per day. Thousands of barrels per day, the impact on the market is not insignificant.
Faced with the increase in shale oil production and the increase in production in other countries, OPEC The production cut this time can be described as knowing that there are tigers in the mountains and going to the tigers in the mountains. If you think about it carefully, there are indeed not many cards that OPEC can play. Cutting production is a chronic death, and not cutting production is a sudden death. At least losing shares and protecting prices can give OPEC a temporary respite, but how long can this respite last?
We mentioned a point in our annual report that before 2015, the U.S. shale oil revolution did not become a major factor affecting the market. OPEC’s market share is also relatively stable, basically maintaining above 33%. Subsequently, in the struggle between OPEC and shale oil, OPEC countries finally surrendered. Since then, production cuts have become OPEC’s last resort to fight and retreat. Shale oil has also gradually eroded OPEC’s market share in this war. . By 2019, Saudi Arabia’s excessive production cuts in order to stabilize oil prices, coupled with the rapid increase in U.S. crude oil production and rising crude oil exports, OPEC’s overall market share has dropped to 30%, the lowest in 10 years. At the end of 2019, OPEC once again reached an agreement to deepen production cuts. Therefore, in 2020, it is conceivable that OPEC will continue to sell market share, and it is a foregone conclusion that the market share will fall below 30%!
OPEC’s loss of market share has continued for three years. In this case, what we are most worried about is that after the production cuts expire in the first quarter of next year, Is there any possibility for OPEC countries to continue to extend? According to the agency’s research report, U.S. crude oil production will continue to grow significantly in 2020, and pipeline capacity in the U.S. Gulf region will also increase significantly. The increase in U.S. crude oil exports is bound to continue to seize OPEC’s market share. With the continued loss of share, certain problems may arise in the internal unity among OPEC.
But fortunately, at least before the first quarter, we are not optimistic about crude oil prices. We should be overly pessimistic. As long as production cuts can be continued, the “OPEC bottom” below oil prices will firmly support oil prices. As the macro environment improves and geopolitical crises continue, the logic of production cuts will become a key driver for oil prices to take off in 2020.
From the demand side, China’s crude oil demand increased in 2019 A relatively large increase, with crude oil imports and refining inputs increasing significantly compared with 2018. After statistics, we found that China’s crude oil demandIt said that at least eight people were killed in the attack, and an anonymous official from the U.S. Department of Defense confirmed to Reuters that the United States carried out strikes on two Iran-related targets in Baghdad that day.
Last Sunday, the United States launched air strikes on military targets of the “Hezbollah Brigades” in Iraq. Subsequently, protests and demonstrations against the U.S. Embassy in Iraq broke out in Baghdad, the capital of Iraq. Trump tweeted He called on Iran to “take full responsibility” for the siege on the US Embassy. Then we saw the bloodshed in Iran and Iraq.
As soon as the news came out, crude oil prices rose sharply in early trading, with Brent prices rising by more than 4%, overturning all previous fundamental and technical logic. Regarding the Iranian issue, we have emphasized many times that the West will not give up until Iran completely surrenders. Recently, Iran and China and Russia conducted joint maritime military exercises. Iran’s show of strength will inevitably arouse the dissatisfaction of Western forces. The geopolitical crisis has never subsided. Of course, more intense incidents cannot be ruled out in the future.
Considering from Iran’s perspective, the United States’ attack on senior Iranian military officers is to force Iran to surrender with a gun. If Iran really surrenders, then Iran’s national future will not be seen. direction. If Iran wants to fight back, there is only one way, and that is to announce its complete withdrawal from the Iran nuclear agreement and to confront the United States and Israel on the frontal battlefield in the Middle East. In this way, it will be clear who is the paper tiger. However, we predict that the possibility of Iran directly using force in the short term is not very high. The two sides will secretly exchange bargaining chips or play games on the Iranian nuclear agreement. If the United States pushes Iran too far, then the possibility of Iran carrying out armed resistance cannot be ruled out.
In fact, since the United States withdrew from the Iran nuclear agreement, the real pressure on Iran has been at the economic level, international public opinion level and internal struggle level. At the economic level, it imposes sanctions on Iran, blocks Iran, and imposes an embargo on Iran’s crude oil exports. At the level of international public opinion, it creates terrorism and extremism and pours dirty water on Iran as soon as possible. The internal struggle manifested itself as senior military officers actively inciting rebellion in Iran, resulting in many of Iran’s military secrets being mastered by the United States.
This direct beheading of the Iranian commander can be regarded as the first step taken by the United States at the military level. Therefore, Iran’s reaction in the later period will directly determine the intensity of the struggle, and will also influence the future trend of crude oil prices. If Iran does not make a violent response, then the United States will naturally have no need to continue escalating. But under such humiliation, it is still unclear whether Iran will be as tough as we expected. After all, when the United States slandered Iran at the level of international public opinion, Iran did not take more drastic measures in retaliation.
In summary, the current fundamentals support the price to remain strong, and the macro level is also conducive to the price continuing to move towards the upper target. Therefore, we believe that the mid-term price I don’t think we should be pessimistic. In the short term, the market is already overbought, and indicators have shown top signals, but whether there will be a correction in prices depends on the subsequent development of the incident in Iran. If Iran continues to give in, crude oil prices will return to the logic of fundamentals and technical aspects, and continue to rise after a short correction; if Iran is prepared to confront the United States head-on, the correction process in crude oil prices may not occur.
What will Iran choose? How to go depends on your decision and actions.
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