Last week, concerns about economic recession enveloped the world. There was a panic slump in the commodity market, and oil prices also experienced violent fluctuations. They plummeted by US$16/barrel in 2 days. This plunge almost changed the price of oil overnight. The bull market pattern of oil prices Facing the biggest challenge this year, market confidence has been hit hard and the bull market is facing the risk of being terminated. However, subsequent weekly data from the EIA showed that the demand for refined oil products in the United States was still relatively strong, which stabilized market sentiment. Oil prices stopped falling and rebounded in key support areas, recovering part of the decline. At the same time that oil prices experienced such violent fluctuations, Wall Street saw a collision of extreme views from the long and short camps represented by Citigroup and JPMorgan Chase. Citi analysts said in the latest report that due to the global economic recession, oil prices may fall to US$65/barrel before the end of the year, and may drop to US$45/barrel by the end of 2023. Analysts at JPMorgan Chase warned that global oil prices could reach $380 per barrel if U.S. and European sanctions prompt Russia to implement retaliatory production cuts. The reason for this situation is obviously that there is too much uncertainty hanging over the crude oil market.
This round of commodity prices has plummeted across the board since mid-June. It is different from the large-scale adjustment in October last year. The background of this fall in commodities is that the global economy is facing high inflationary pressure, and global liquidity tightening and economic recession concerns have dominated the macro economy. Based on the allocation ideas of major asset classes, the stock market and commodity market have entered the bubble squeeze stage. Whether from the perspective of risk management or hedging, funds are increasing their short selling of commodities. The original strong pattern of oil prices has been loosened. The monthly spread structure is still relatively strong, and the absolute price has also maintained the lower edge of the high range. The biggest change is that the refined oil market has cooled down significantly. The cracking spread has fallen sharply from the high level and is still much higher than the same period in history. Performance. Looking to the later period, with the ebb and flow of long and short news, there is a high probability that the third quarter will be a turning stage for oil prices.
Demand concerns are temporarily suspended, but the interpretation of supply and demand remains the focus of attention
Oil prices can go from a high of US$125/barrel to falling below US$100/barrel in July. This performance has a lot to do with the fact that EIA data at the end of June showed that gasoline and diesel consumption declined significantly and inventory accumulation exceeded expectations. This has made U.S. gasoline It once fell by more than 25% from the high point in June, far exceeding the decline in the crude oil market, and also caused a sharp contraction in the profits of refined oil cracking in Europe and the United States. The upward trend in oil prices that began at the end of April was largely driven by the sharp rise in refined oil prices in Europe and the United States due to tight supply. Considering that the demand for refined oil products is obviously suppressed by high oil prices, if Subsequent data further confirmed this phenomenon, and the market was worried that the engine driving upward oil prices from the demand side would stall. Therefore, the market has begun to pay close attention to the performance of the demand side. Investors are worried that the global economic outlook is not optimistic. If high oil prices further suppress fuel demand, oil prices are likely to turn around.
However, EIA data last week temporarily eased market concerns. EIA data shows that in the week ended July 1, U.S. gasoline inventories decreased by 2.497 million barrels, compared with an expected decrease of 1.05 million barrels; refined oil inventories decreased by 1.266 million barrels, compared with an expected increase of 1 million barrels. U.S. gasoline and diesel consumption data, which had previously fallen sharply, still declined year-on-year, but rebounded significantly month-on-month. This alleviated concerns about suppressed demand and also significantly eased last week’s higher-than-expected accumulation of 8.23 million barrels of crude oil inventories. Analysts originally expected a decrease of 1.55 million barrels due to the negative impact. The increase in U.S. crude oil inventories is partly due to a substantial increase in net imports, and partly because the U.S. government continues to release nearly 6 million barrels of strategic crude oil into the market. Oil prices still performed relatively strongly after the release of inventory data, which has a lot to do with improved demand for refined oil and improved market expectations.
From a supply perspective, in the past week, there have been events including a strike by Norwegian oil industry workers, a reduction in OPEC production, continued instability in Libyan crude oil production, and possible oil supply interruptions from the Caspian Pipeline Consortium (CPC). The market has also used this to Hype on the fragility of the supply side was ultimately suppressed by concerns about the prospect of a global economic recession at the macro level suppressing fuel demand, and oil prices fell sharply as a result. However, Biden’s meeting with leaders of Gulf countries in mid-July will become the focus of market attention. Although Biden has previously emphasized that this trip is not specifically to ask Saudi Arabia to increase production, he will still meet with the Saudi King and his team at the appropriate time, hoping to discuss the issue of “energy security” during the meeting. If the relationship between the United States and Saudi Arabia eases again, Saudi Arabia may turn to support increasing production to help the Biden administration control inflationary pressure. This is a factor that needs to be paid attention to in the future.
It is worth mentioning that the global epidemic has re-emerged recently. Although countries have accumulated a lot of experience in responding to the epidemic and minimizing its impact on the economy, the epidemic will still affect economic recovery and the demand for bulk commodity markets. This isn’t good news for oil prices either.
Recession Pressure vs. Fed’s Tightening Pace
Last Friday (July 8), non-agricultural data released by the U.S. Bureau of Labor in June showed that non-agricultural employment increased by 372,000 people. The number of new non-agricultural employment in May was revised down from 390,000 to 384,000. The number of new non-agricultural jobs in February was revised down from 436,000 to 368,000. The strong growth in U.S. employment data further highlights the contrast between the resilience of the job market and the bleak economic outlook.
The June non-farm payrolls report solidified the view that the Federal Reserve will raise interest rates by 75 basis points in July. John Williams, president of the Federal Reserve Bank of New York, said that inflation is “extremely high” and is the biggest threat to the economy. Policymakers are “firmly committed” to getting the inflation rate back to the 2% target level. The speed of raising interest rates will depend on the economy. situation. The Federal Reserve’s 75 basis point interest rate hike in June “is a key step in rapidly shifting away from the very loose monetary policy stance at the beginning of the epidemic.” “In determining the speed and extent of future interest rate increases, we will closely monitor economic conditions, explore the impact of tightening financial conditions on the economy, and changes in inflation, inflation expectations and the economic outlook. We will rely on data and remain flexible sex.”
Under the pressure of high inflation, central banks around the world have accelerated the pace of interest rate hikes, resulting in tighter liquidity and pressure on the economy. This is an important reason for bulls to withdraw from the commodity market. The latest non-farm data exceeds expectations and strengthens the Fed’s continued sharp expansion. Interest rate hike expectations are not good news for the commodity market. After the middle of the year, the impact of macro factors on commodities gradually increased, which pushed more and more commodities to end the bull market and enter a technical bear market.
Although concerns about economic recession have caused more and more commodities to enter a bear market, crude oil is still the most resilient commodity among commodities. Although the thrilling plunge once triggered panic in the crude oil market and forced bulls to leave the market for safety, oil prices are still facing numerous uncertainties, which is why extreme long-short views have emerged. Judging from our tracking of the impact of geopolitical factors on oil prices in the first half of the year, many expectations for the impact on oil prices have been overreacted. Looking forward to the second half of the year, it is expected that there will continue to be speculation about the fragile supply side and the energy crisis. However, the shift in supply and demand under the background of high oil prices is the general trend. There is a high probability that the center of gravity will gradually shift downward after oil prices gradually reach a peak amid major fluctuations. , need to pay attention to the rhythm.
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