As market expectations for the Federal Reserve’s aggressive interest rate hikes within the year have rapidly increased, the crude oil market has fluctuated at high levels in the past two days, with Brent crude oil remaining above $120 per barrel. Compared with the sharp decline in U.S. stocks and commodities in the capital market, crude oil has been relatively strong and has emerged from a relatively independent market.
In this regard, Liu Shunchang, an energy analyst at Nanhua Futures, said that after the unexpected US inflation data released last Friday, the expectation that inflation would peak was falsified. The market’s expectations for the Federal Reserve to raise interest rates at a faster pace have increased, and the US economic recession is expected. Expectations have emerged again, putting pressure on the stock market and the demand side of commodities. At the same time, crude oil has a relatively strong trend amid tight supply and resilient demand.
“The current core logic is that against the background of low inventories of crude oil and major refined oil products, the supply side is still inelastic, while the demand side is rising month-on-month.” said Zhang Zhengze, a researcher at Guohai Liangshi Futures.
From the supply side, OPEC’s production increase efficiency is still not high. Small countries such as Nigeria and Libya do have bottlenecks in increasing production, and large countries like Saudi Arabia are not very enthusiastic about increasing production. Although the recent OPEC+ meeting decided to increase production for seven Crude oil production in August slightly increased by around 200,000 barrels per day, but considering OPEC’s current low efficiency in increasing production, it may be difficult to achieve this small goal.
In terms of Russian crude oil exports, with the implementation of the EU’s sixth round of sanctions against Russia, shipping export data may still decline, but considering the methods used by Russian oil companies to evade sanctions, the magnitude may not be as large as expected.
In terms of U.S. shale oil, judging from the leading position of drilling rigs in crude oil production, the growth rate and absolute magnitude of drilling rigs are quite different from the rapid recovery of production in 2017. It is still difficult to significantly increase crude oil production in the short term, and due to the shale oil companies Most of the financing methods are bond financing.
“The U.S. high-yield energy corporate bond option-adjusted spread index represents the risk premium required by bond market investors for investments in the oil and gas industry. The higher the risk premium, the less funds will flow to the oil and gas industry for capital expenditures. At present, this risk Premium demand has not continued to decline, which is not conducive to the increase in capital expenditures in the oil and gas industry, and the corresponding subsequent increase in the number of active drilling rigs is not optimistic,” Zhang Zhengze said.
With supply continuing to be tight and supporting oil prices, the demand side of the crude oil market is the focus of the market. Including global economic growth expectations and demand for refined oil products, especially when high oil prices will produce negative feedback on demand.
“At present, the negative feedback of high oil prices on demand is not obvious, and the demand for refined oil remains strong.” Liu Shunchang believes that the upward drive of the crude oil market has weakened since last Friday, and the macro-level impact on oil prices will continue to increase in the later period. “After the U.S. CPI exceeded expectations in May and the Federal Reserve accelerated monetary tightening, global economic growth expectations continued to decline, and the negative impact of high oil prices on consumption has emerged. Whether it can be sustained and form a negative feedback on oil prices remains to be seen.”
“Considering that the supply-side elasticity has not changed much, the early third quarter is still in the peak driving season, and gasoline inventories are at an absolute low in history, we believe that crude oil prices will be more volatile from the end of the second quarter to the early third quarter. However, considering that the American public Regarding the acceptance of high-priced gasoline, it will be difficult for oil prices to significantly break through 130 US dollars per barrel, and the overall fluctuation range will be limited unless the EU’s oil embargo on Russia is further deepened or the process is accelerated, resulting in a strong rise in crude oil.” Zhang Zhengze said that from the late third quarter to the early fourth quarter, as manufacturing-related demand further weakens, crude oil prices may enter a wider oscillation range, and the fluctuations will further intensify.
“On the whole, OPEC’s production increase is less than expected, EU sanctions on Russia, gasoline peak season demand and low inventories are still important factors supporting oil prices. Pay attention to the Federal Reserve’s interest rate decision this week and be wary of the macro shocks that the short-term crude oil market may face.” Liu Shunchang explain.
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