Crude oil prices continued to oscillate upward last week, with rising lows, showing clear signs of bullishness. Brent oil prices have been hovering between 37 and 46 US dollars per barrel for three months, and the main contradictions in the market have become relatively vague. Recently, we have also discovered that the crude oil market is somewhat immune to changes in fundamentals. Whether it is good news or bad news, the price response is very flat. On the contrary, macro market fluctuations have a relatively greater impact on prices.
The direct manifestation of the macro market is the trend of U.S. stocks. Recently, U.S. stocks have been extremely strong and prices have continued to rise. The Dow Jones has broken through new post-pandemic highs. It is just over 1,000 points away from its all-time high, and the S&P index is close to its all-time high. This reflects that the U.S. financial market has downplayed the impact of the second outbreak of the epidemic, mainly due to the continuous release of liquidity in the United States. Under the unprecedented scale of economic stimulus policies in the United States, the substantial release of liquidity has caused market risk appetite to return again.
We have always emphasized that under the current circumstances, as long as the US stock market does not collapse, there is no basis for a sharp decline in crude oil prices. The current market fundamentals still maintain a strong pattern. Although OPEC production cuts The execution rate has declined, but with the help of a rebound in demand, the overall fundamentals are still tight in supply and demand. The strength of fundamentals has supported the bottom below the price, and the rebound in risk appetite in the macro market has also given the price the impetus to continue upward. But the problem now is that in our opinion, the so-called rebound in demand has still not reached the level before the epidemic. At the same time, the instability of Sino-US relations has also led to very large market variables. The price of gold continues to hit new highs, indicating that the market is relatively worried about macro risks. Buffett’s current stock holdings have returned to lows and the level of cash holdings has reached highs. This in itself shows that big funds are worried about market risks, so the price wants to There is still a lot of resistance to break through.
The better news at the moment is that Russia has announced that it has successfully developed a vaccine, and Putin said that his daughter has been vaccinated. The Russian vaccine has received nearly 1 billion orders. Although we all know that the Russian vaccine has only undergone the first phase of trials and has not conducted the third phase of trials in accordance with WHO standards, the advent of the vaccine has stimulated the macro market to a certain extent. Much enthusiasm.
In addition to Russia, the United States, the United Kingdom, Germany and China all have their own vaccine research and development teams. China is currently known to be making the fastest progress. Phase III experiments in China have been launched in places such as Brazil and Abu Dhabi, and tens of thousands of people have participated. This is currently the fastest developed and safest vaccine in the world. China’s vaccines can already be used in emergencies, which shows that their safety is still very high. The current focus of the market is the time when the vaccine will be launched. If the vaccine can be promoted on a large scale soon, it will be a great benefit to the financial market.
OPEC production cuts begin to decline
An agreement was reached at the previous OPEC meeting that countries that had previously cheated in production reductions must make up for it in August and September, with a compensation reduction of nearly 800,000 barrels per day, which will offset part of the impact of OPEC’s future production increases. . The production reduction compensation plan submitted by Iraq shows that it will make up for 70,000 barrels/day in July, 314,000 barrels/day in August, and 313,000 barrels/day in September. Iraq’s production reduction in June did not meet the standard, and the implementation rate of production reduction was only 88%. This means that Iraq needs to continue to reduce production by 190,000 barrels in July. In fact, not only did Iraq fail to complete its production reduction tasks, but it also did not reduce production additionally. Instead, it increased crude oil production in July. OPEC’s monthly report showed that Iraq’s production in July was 3.752 million barrels, an increase of 38,000 barrels from last month, and the production reduction implementation rate fell from 88% to 85%.
This kind of operation by Iraq makes us seriously doubt its implementation of production cuts in August and September. In the previous OPEC production reduction agreements, Iraq’s production reduction implementation rate could not reach 100% most of the time. In the 2019 production reduction agreement, Iraq did not even meet the standards for one month, and it continued to increase production after the agreement was reached. Iraq’s performance disappointed the market.
Countries that have implemented production cuts relatively well include Saudi Arabia, the United Arab Emirates, Algeria and Angola. Saudi Arabia and the United Arab Emirates have made greater contributions to the market. The production reduction implementation rates of these two countries are respectively 103% and 102%, exceeding production cuts by 86,000 barrels and 16,000 barrels. Compared with June, the crude oil production of Saudi Arabia and the United Arab Emirates increased significantly by 866,000 barrels, and the crude oil production of the United Arab Emirates increased by 98,000 barrels. The main reason for the increase in crude oil production of the two countries was that they implemented excessive production reduction plans in June.
Countries with poor implementation of production cuts include Nigeria, Iraq, Gabon and Equatorial Guinea. The two countries that have the greatest impact on the market are Nigeria and Iraq. The implementation rates of production cuts in these two countries are They were 82% and 85% respectively, with uncompleted production reductions of 76,000 barrels and 160,000 barrels. Like Iraq, Nigeria’s 2019 production reduction agreement was not completed for a month. Its production has been maintained at the level before the production reduction agreement. Participating in production reduction is just a “talk”. Therefore, based on the performance in July, we have reason to suspect that these two countries will still cut corners in the next production reduction agreement.material.
Demand is gradually recovering
China’s demand is supporting crude oil prices The main factor maintaining the current position is that although some people in the market earlier predicted that China’s demand may stall, the data tells us that this inference is wrong. At present, the operating rate of domestic refineries is still at a high level. The operating rate of main refineries has returned to a historical high. The operating rate of local refineries has reached a new historical high. This situation of maintaining a high operating rate is the biggest support for China’s demand. .
However, we have also recently seen reports of a significant backlog of tankers at ports. These purchased and unused crude oil inventories will be a potential hidden danger for future demand, but this hidden danger has begun to show signs of growth since June. Up to now, China’s crude oil procurement still shows no signs of slowing down, so there is no need to worry in the short term because of high inventory levels. There has been a sharp decline in Chinese purchases.
The latest data shows that the cumulative number of confirmed cases of the new crown epidemic in the United States has reached 5.5 million, with 60,000 new cases added that day. Although the daily increase trend shows signs of slowing down, In absolute terms it is still relatively high. However, last week’s EIA data showed that U.S. refinery operating rates continued to rebound. Although the United States is still troubled by the epidemic, its economic recovery is gradually proceeding. Refinery operating rates and refining input data have significantly improved. Although the current level There is still a certain gap from the historical average, but we at least see signs of improvement.
The cumulative number of confirmed cases of COVID-19 in India has reached 5.5 million, with an increase of 65,000 that day, surpassing the United States and becoming the country with the highest number of new cases in the world that day. Unlike the United States, the epidemic in India is still spreading rapidly, and we have not yet seen obvious signs of slowing down.
According to Indian data, India’s oil refining demand rebounded in June, and India’s crude oil imports fell sharply in June. Judging from data on refined oil products, India’s gasoline demand in June has returned to historical levels for the same period and exceeded the demand for the same period in 2017, and diesel demand is recovering. We are more worried about India’s data. The epidemic is so severe and crude oil imports have fallen sharply. Unless the vaccine is fully popularized, we should not have high expectations for India’s demand.
Based on the fundamental situation, although the recovery of demand is still relatively slow, it is at least still recovering. Although the implementation rate of production cuts on the supply side has declined, the current level is more than enough to maintain tight supply. Therefore, there are still no major variables in the fundamentals, and it is basically within the market’s expectations.
The first phase of China-U.S. The results of the economic and trade agreement will be released in the near future, and the direction of Sino-US relations will greatly affect the trend of crude oil prices. Therefore, the recent meeting is very important for oil prices. Last week, the Ministry of Commerce stated that China has tried its best to implement the first phase of the agreement. Due to the force majeure of the epidemic, the implementation of some agreements is not in place, which shows that China hopes to reduce friction with the United States. U.S. technology giants have also begun to put pressure on the Trump administration. Therefore, the warming of Sino-US relations seems to be in the interests of both parties, which is a relatively good thing for the macro market.
Due to election needs, Trump very much hopes that China can purchase large quantities of American agricultural products. At the same time, on the issue of fighting the epidemic, the United States is also in urgent need of vaccines and anti-epidemic materials from China, so the possibility of further deterioration in Sino-U.S. relations is unlikely. However, given Trump’s erratic performance in previous trade negotiations, we cannot rule out the possibility of Trump turning his back again. Therefore, it is necessary to pay close attention to the impact of the date of the Sino-US talks and the content of the talks on the macro market.
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