Since the end of June, international crude oil prices have continued to rebound and hit new highs during the year. The highest price of active NYMEX WTI crude oil futures contracts exceeded US$83/barrel, and the price of ICE Brent crude oil approached US$87/barrel. However, the current crude oil price is still far lower than the same period last year. The main driving force for this round of rebound in crude oil prices comes from the supply-side production cuts. Global demand is not strong because the economic growth of European and American economies continues to slow down. Only China’s crude oil consumption Restorative growth occurs. Looking ahead to the market outlook, the U.S. economy has a clear momentum of slowdown. However, as the expectation that the Federal Reserve will suspend interest rate hikes has stimulated investment demand for crude oil, the trend of crude oil prices in the market outlook depends on whether the European and American economies will fall into recession.
Supply contraction boosts crude oil prices
In 2023, the scale of OPEC+ production cuts will continue to expand, and the slow recovery of U.S. shale oil production will lead to the contraction of crude oil supply and the depletion of market inventories. This is also the biggest driving force for the rebound in crude oil prices. On August 3, the Saudi Ministry of Energy extended the voluntary additional crude oil production cuts in July for another month to the end of September, while retaining the option to extend the production cuts again. Since May this year, Saudi Arabia has voluntarily cut production by 500,000 barrels per day. Together with another 1 million barrels per day reduction in July, this means that starting from July this year, Saudi Arabia’s average daily crude oil production has been reduced to 9 million barrels.
The picture shows OPEC crude oil production and year-on-year
On August 4, the OPEC+ ministerial meeting stated that the committee will continue to closely evaluate market conditions and will urge member states to fully implement their production reduction commitments. OPEC+ has previously conducted multiple rounds of collective production cuts, and this meeting did not adjust the current production policy. As of now, the OPEC+ group’s collective production reduction, excluding additional voluntary production cuts, is 3.66 million barrels per day, accounting for 3.6% of global oil demand.
Looking at actual production, the monthly report released by OPEC showed that OPEC crude oil production reached 28.189 million barrels per day in June and 28.1 million barrels per day in May, which was lower than the 28.685 million barrels per day in the same period last year.
On August 3, Russian Deputy Prime Minister Novak stated that in order to ensure that the oil market remains balanced, Russia will continue to voluntarily cut crude oil supply in September by 300,000 barrels per day. Data show that Russia’s oil production fell to 9.45 million barrels per day in June.
U.S. shale oil production has been slow to recover, with the latest data showing U.S. drilling activity is slowing. From 2016 to 2017, the substantial growth in U.S. shale oil production was the main cause of global crude oil supply excess. Therefore, the decline in U.S. crude oil production means that shale oil will not be an impact factor on future crude oil supply. Data show that the number of U.S. crude oil rigs fell to 525 in the week ended August 4, the lowest record since March 11. As of the week of July 28, U.S. crude oil production was 12.2 million barrels/day, down 200,000 barrels/day from the previous month. Excluding the Gulf Coast, crude oil and condensate production in the 48 U.S. states only increased by 1.9% from the previous month. Thousands of barrels/day.
Driven by production cuts, international crude oil inventories have been reduced. In the week ending July 28, U.S. EIA crude oil inventories plummeted by 17.049 million barrels to 440 million barrels, the largest weekly decline in history, far exceeding expectations. However, judging from historical data, although the current U.S. crude oil inventory has dropped significantly compared with the same period in 2020-2021, it is still at a historically high level, indicating that global crude oil demand is declining, resulting in a relatively slow destocking rate.
Seasonal recovery in short-term consumption
In the short term, crude oil consumption shows a seasonal rebound. Several oil industry executives said that oil demand in the third quarter of 2023 will be stronger than market expectations at the beginning of the second quarter. Goldman Sachs expects global crude oil demand in July to be 102.8 million barrels per day, the highest level on record, amid a summer surge in air and road travel. Novak said at the OPEC+ meeting that global oil consumption may grow by 2.4 million barrels per day this year.
However, the growth in U.S. crude oil consumption in the third quarter may be driven by the summer travel season and is phased. In recent years, the economic downturn in the United States has been coupled with the energy transformation. The growth of oil consumption has slowed down, and its proportion in the energy consumption structure has also declined year by year. From a long-term perspective, the U.S. energy transformation is gradually advancing. In the future, the proportion of traditional energy sources such as coal and oil in the U.S. energy consumption structure will gradually decrease, and the proportion of clean energy and renewable energy consumption will further increase.
According to BP data, U.S. oil consumption reached 20.53 million barrels per day in 2005. Since then, it has shown a downward trend. It increased again from 2012 to 2019, but has not exceeded the peak level in 2005. U.S. oil consumption accounts for about 20% of the world, with gasoline accounting for the largest share, followed by diesel and aviation kerosene. However, with the gradual saturation of U.S. per capita car ownership and the development of new energy vehicles, U.S. gasoline consumption is expected to continue. Downward trend.
China’s crude oil consumption maintains rapid growth. Data released by the General Administration of Customs showed that China’s crude oil imports increased by 12.5% year-on-year from January to July. The main reasons are firstly that domestic gasoline and diesel stocks are low, and secondly that the processing profits of China’s main operations and local refineries are at a high level (more than 900 yuan/ton in July), and the import enthusiasm is very high.
In addition, U.S. economic indicators show that its economy is decelerating significantly. After the U.S. “small non-agricultural” ADP report in July exceeded expectations, the non-agricultural report was unexpectedly disappointing, with new jobs significantly lower than expected and the highest in two years.�The lowest record since. In addition, U.S. wholesale sales in June fell by 0.7% month-on-month, and were expected to rise by 0.1%. The previous value was revised from a decrease of 0.2% to a decrease of 0.5%. It is worth noting that Fitch announced that it would downgrade the U.S. credit rating from AAA, the highest level, to AA+, becoming the second major rating agency to remove the U.S. AAA rating after S&P. The reasons are fiscal concerns, deterioration of U.S. governance, and political polarization, which have led to lack of confidence in the U.S. government’s ability to solve fiscal and debt problems.
To sum up, the author believes that the phased rebound in international crude oil prices mainly comes from the production reduction on the supply side, and demand is only recovering in phases. In the fourth quarter, as the summer travel peak ends, U.S. crude oil consumption will fall. Moreover, there is a risk of recession in the European and American economies in the fourth quarter, and current economic indicators are weakening. In the long term, energy transition will also curb crude oil consumption. Investors need to be wary of the risk of international oil prices rising and falling. They can use CME Group’s WTI crude oil weekly options (commodity code: LO1-LO5) to manage risks. WTI crude oil weekly options trading volume is surging, with volume in June 2023 up 136% year-over-year, making weekly options one of CME Group’s fastest-growing energy products.
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