An own error detonated the oil market
On the evening of July 17, a news report “Reuters reports: Saudi Arabia’s Ministry of Energy said it will extend voluntary production cuts until the end of 2024” triggered a huge shock in the crude oil market. Both U.S. oil and Brent oil rose by more than 2%. European energy stocks Stocks followed suit.
But soon news came out, and Reuters withdrew the report, calling it old news from June 4. U.S. oil and Brent oil gave up all their gains within 25 minutes. During the U.S. stock market session, U.S. oil and Brent oil both fell by more than 1%.
As of the close, WTI August crude oil futures closed down 1.68% at $74.15 per barrel. Brent September futures closed down 1.72% at $78.50 per barrel.
The fierce game between the long and short sides of crude oil
On July 17, Ed Morse, head of commodity research at Citibank, said that crude oil bulls are completely wrong and the tight oil market is just an illusion. Morse said it was unrealistic for crude oil markets to believe that demand for crude oil is about to rise in various countries: Europe is in recession and it is still unclear whether the United States will have a hard landing.
However, the IEA pointed out in its latest report that supply in the oil market is expected to be tight in the second half of this year due to strong demand from China and other developing countries, as well as recent announcements by Saudi Arabia and Russia to reduce supply.
“We expect the market to tighten significantly,” said Toril Bosoni, the IEA’s head of oil markets. “With seasonal increases in demand, we do think there is potential for prices to continue rising in the third quarter.”
Dong Dandan, chief analyst of CITIC Futures Energy, said that the crude oil market structure is still relatively healthy, and the benefits come not only from macro stabilization, but also from the industrial side.
According to Dong Dandan, from the perspective of terminal consumption, land transportation has increased and decreased in various regions around the world, while air transportation has continued its upward trend. In the week ending July 12, congestion levels in China fell by 3.5%, Europe also fell by 2.3% month-on-month, and Asia and other regions in North America increased by 10.3% and 13.4% respectively. Passenger flight schedules for the week to July 17 mean that global jet fuel demand will increase by 1.6% compared with the previous week, with Asia and North America leading the weekly gains, both rising by 1.9%. From the demand side, the biggest benefit is that there are signs of economic stabilization and recovery in China and the United States. The year-on-year increase in U.S. CPI was the smallest in more than two years, and the core CPI increase was also the lowest since 2021. The PPI in June rose only 0.1% year-on-year, and the Federal Reserve’s tightening policy is coming to an end. At the same time, China has extended its financial support policy for the real estate market to December 31, 2024, encouraging financial institutions and real estate companies to support project completion and delivery through loan extensions and adjustments to repayment arrangements.
“In the past week, the three major energy agencies have reiterated the fact that there is a gap in the crude oil market in the third quarter. In the past week, only the United States has accumulated inventory, and other regions have reduced inventory or maintained stable inventories. The monthly difference in crude oil has remained stable, and the crack price difference in refined oil has remained stable. A slight rise. We believe that crude oil may maintain oscillations or continue to rise slightly, but the probability of a sharp correction is small.” Dong Dandan said.
GF Futures analyst Zhang Xiaozhen believes that the improvement in the supply and demand structure of crude oil in the second half of 2023 is mainly due to OPEC+’s implementation of production cuts. While Russia’s production is expected to remain stable, Saudi Arabia’s 1 million barrels per day voluntary production reduction from July to August has made the supply side Further tightening, coupled with the better performance of demand during the overseas travel peak season in the third quarter, the supply and demand structure is expected to improve to a great extent in the third quarter, and the fundamental support of crude oil is also relatively strong. The supply side continued to have low elasticity in the fourth quarter, and demand expectations also improved marginally. Under this baseline expectation, EIA and IEA judged that the crude oil market will continue to destock in the fourth quarter.
“Looking forward to the second half of the year, under the baseline situation of a shallow overseas economic recession, the fundamental support for crude oil in the second half of the year will still be relatively solid. Brent crude oil’s first-half low of US$70/barrel may be difficult to fall below, and the most likely dimension of the expected difference is still It lies on the demand side. If the lagging effects of overseas high interest rate policies appear in the second half of the year and the degree of overseas recession exceeds market expectations, both macro sentiment and demand will weaken and will continue to suppress oil price performance,” Zhang Xiaozhen said.
In terms of fuel oil, Yide Futures analyst Chen Tong said that in the second half of the year, the high- and low-sulfur fuel oil market may mainly operate in a range due to the seasonal off-peak and peak seasons. In terms of low sulfur, China’s bonded ship fuel demand is expected to increase, and East Asia’s power generation demand will also strengthen seasonally. However, due to economic reasons, power generation demand may decline marginally this year, and the number of arbitrage cargoes from the West is also expected to increase. In terms of high sulfur, as China’s diluted asphalt customs clearance issue is resolved, the demand for high-sulfur fuel oil substitution may decline to a certain extent. However, the reduction of crude oil production in Middle Eastern oil-producing countries may indirectly increase the power generation demand for high-sulfur fuel oil. If China’s fuel oil import quota fails to be implemented, high-sulfur fuel oil will face greater downward pressure after the peak power generation season in the Middle East in the third quarter.
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