Multiple negative impacts caused international oil prices to experience a cold wave in November. The front-month contract of WTI crude oil plunged 20.8% and entered a bear market. The 16.4% decline of Brent crude oil futures in a single month also set a new record since March last year. Poor performance.
According to the schedule, OPEC+, an organization of oil-producing countries, will hold a monthly ministerial meeting in the near future to finalize production levels in January next year. At an earlier media briefing, the organization postponed some meetings and said it would seriously consider the current epidemic factors.
Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with China Business News that the market is facing two huge unknowns, one is the seemingly endless battle with the virus, and the other is the It is a game between producers and consumers. Schwartz believes that given the fragile supply and demand outlook, it is increasingly likely that OPEC+ will announce a suspension of production capacity, and does not even rule out freezing production for more than one month.
Throwing away reserves and the epidemic hit each other in turns
At the plenary meeting held last month, OPEC+ withstood pressure from the United States for the third consecutive time and continued to release production capacity at a scale of 400,000 barrels per day. Oil prices have returned to US$80 after four years, allowing oil-producing countries to reap the benefits of production restrictions. However, risks are already brewing.
After weeks of preparation, the White House announced its decision to sell crude oil reserves on November 23. The U.S. Department of Energy will release 50 million barrels of crude oil and will also work with countries such as India, Japan, South Korea, and the United Kingdom to release strategic reserves. High oil prices are continuing to push up the cost of living for people in various countries. The CPI of the Eurozone, which has been in a quagmire of low inflation for a long time, is approaching 5%. Many emerging market countries have entered an interest rate hike cycle in response to inflationary pressures.
For the United States, rising gasoline prices could have political implications for the Democratic Party heading into the 2022 midterm elections. U.S. gasoline prices soared to seven-year highs nationwide, hitting $4 a gallon in Nevada, Washington and Oregon. The declining public support makes the Democratic Party’s midterm elections next year grim.
Statistics from China Business News reporters found that since Biden clearly released the signal to sell reserves in early November, the international oil price range has fallen by more than 10%. When the outside world had almost digested the relevant impact, the emergence of the Omicron strain pushed crude oil into the quagmire of a bear market. As many countries including the United States, Europe, and Asia announced the implementation of travel bans, panic escalated rapidly. Last Friday, the front-month futures contract of the two major crude oil prices fell by more than 10% in a single day. This reminds people of the crude oil market in April last year due to shortage of inventory space. A dark moment of exhaustion.
Varga told China Business News that there is a big difference between the situation now and last year. At the time when the epidemic was at its worst, many people tried to short the market, and futures contracts of all terms showed a premium structure. Now bulls still dominate, but it can be seen from the significant reduction in the premiums of each contract that the originally optimistic prospects for economic recovery is facing a test.
Varga believes that compared with the impact of joint reserve selling by various countries on the supply side, investors are obviously more cautious about the impact on the demand side. Vaccination is crucial to winning this battle. However, at this stage, the global vaccination rollout is still uneven, and news about the rebound of the epidemic in many places and the mutation of the new coronavirus strain are making the outlook for energy demand increasingly uncertain.
The risk of imbalance between supply and demand rises
In fact, when a new wave of epidemics emerged in Europe in mid-November, Mohammad Barkindo, Secretary-General of the Organization of the Petroleum Exporting Countries (OPEC), had already warned of oversupply in the market. In the derivatives market, bulls are rapidly ebbing. Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that the net long position in crude oil has dropped to about 300,000 lots in the week as of November 23, a 20% decrease from a month ago.
The International Energy Agency (IEA) pointed out in a market report released last month that although demand for crude oil remains strong, supply is gradually catching up. In October, global oil production reached 97.7 million barrels per day, and in November and December oil production will continue to increase by 1.5 million barrels per day. The IEA predicts that the global oil inventory curve, which has continued to decline, is reversing.
For OPEC+, competition from non-OPEC oil-producing countries also needs to be vigilant. China Business News previously reported that countries such as Canada, Brazil and Norway have been significantly increasing production since the fourth quarter. The “Short-term Energy Outlook” released by the U.S. Energy Information Administration (EIA) on November 9 predicts that high oil prices will attract more production capacity to the market, and the world may have 500,000 barrels of excess production capacity per day early next year.
The joint selling of reserves by various countries is making the situation more complicated. OPEC’s Economic Commission Board assessed this last week. The conclusion is that if 66 million barrels of strategic reserve oil flow into the market as planned, then next year 1.The global oil surplus will increase by 1.1 million barrels per day in February and February to 2.3 million barrels per day and 3.7 million barrels per day respectively. It should be noted that this forecast was released earlier than the time when the Omicron strain was reported in South Africa, and the reality may be more severe.
Regarding today’s meeting, Varga told China Business News that considering all factors, the most likely outcome is to postpone the release of 400,000 barrels of production capacity, and does not even rule out the possibility of extending the period. Of course, this depends on the organization’s internal response to the epidemic. assessment, some oil-producing countries may object. OPEC+’s goal is to ensure a stable and balanced oil market, so temporarily shelving production increases can not only offset the negative price impact of releasing strategic reserves, but is also a necessary means to send out signals of stability and improve the supply and demand situation. He believes that in the short term, oil price trends are still closely related to the epidemic situation, and global oil demand growth may face pressure early next year. However, as spring approaches, breakthroughs in virus and vaccine research may ease the impact on the energy demand side. Lrent crude oil is expected to find support near $70.
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