At the end of April, we made an analysis and outlook on this year’s crude oil pattern. The main point is that the main line of crude oil this year is that the improvement of the epidemic has brought about an increase in demand of about 5 million barrels per day, while the supply side is passive, matching demand to release production. Since the largest weight on the supply side falls on OPEC, as long as OPEC insists on releasing production, the market will enter a destocking rhythm, and oil prices will tend to rise. Therefore, the unilateral oil price depends on the policy bottom of 60, and the upward momentum depends on the realization of demand. At the end of April, we also spent a lot of time arguing that the overall demand has not yet picked up, especially as the epidemic in Europe is still severe and diesel has shown no improvement. We need to see the recovery of diesel to judge the pace of demand recovery.
We made observations on the same issue at the end of May. On the demand side, we can clearly see that the United States is very healthy. Gasoline inventories are very low and crack spreads are high. Since the refinery operation has not yet been started, At that time, it only increased the yield of gasoline, thus reducing the supply of diesel in disguise, which was beneficial to diesel. At the same time, we have seen that the inventory of jet fuel is rising rapidly, but the price has not fallen, because the market believed that the vaccine in the United States would be completed by the middle of the year, so this accumulated inventory actually reflects that refineries are preparing to stock jet fuel in advance. Both sides have diverted the supply of diesel, which has significantly reduced the originally relatively poor diesel inventory. At that time, U.S. inventories of diesel, the worst-performing petroleum product, were below their five-year average. Basically, the refinery start-up is definitely going to start, so as of June, we have also seen that the refinery start-up is indeed picking up very quickly, and it has been close to the five-year average, returning to a normal level.
In Europe in May, we can see that with the improvement of the epidemic, travel has begun to improve slightly. , Diesel cracking has finally started to strengthen from a low level, and refineries have also started to increase operations, but the extent is still relatively limited. Extending to Asia, diesel stocks are still high, and they are slowly rising along with Europe. Therefore, the United States has created a large price difference between diesel prices in Europe, while Singapore and Europe have basically maintained the same price, and are still in the process of climbing out of the trough.
So it can be basically judged that demand must have strengthened from April to May, but Europe is the region where global demand is recovering. The main body has not yet become obvious.
Now in June, refineries in the United States are rapidly restarting operations, which has led to an accumulation of gasoline and diesel stocks, and cracking has fallen from highs. The travel situation in Europe has improved significantly. The rapid depletion of diesel inventories has led to the rapid depletion of diesel inventories in Singapore. Even if the diesel crack price difference in the United States has fallen, Europe itself has remained unchanged. The previously large US and European diesel prices have been repaired. One thing that reflects from the side is that demand in Europe has indeed taken over and strengthened. This fulfills the logic that we have always said that as long as Europe and diesel rise, demand will rise. At present, we feel that this logic has not completely come to an end in the process of realization, but the market has indeed given relatively sufficient expectations. In other words, the demand previously expected in the balance sheet will recover at the handover of the second to third quarters, and it is indeed at this point in time.
On the supply side, the biggest disturbance at present is mainly the issue of Iran. The market is mainly concerned about “how long the negotiations will take”, “whether the negotiations can be successful” and “if the negotiations are successful, what will happen to Iranian oil?” How quickly will it return to the market?” At the end of May, Iran released news that the United States was about to lift its financial embargo and would resume production at a faster pace. This impacted the relatively optimistic balance sheet in April. However, negotiations have been blocked since then. As of now, it can be considered that 1) after the nuclear agreement is successfully negotiated, it will take about a month to resume production, so a rapid increase in production may occur after September. 2) Production this year will be approximately 2.5 million barrels per day from the current level. Less than a few, it has recovered to 3.4 million barrels per day, and will continue to recover to 3.8 million barrels per day next year. 3) Iran still has 75 million barrels of oil in stock. It is unclear how it will be released, which may have a short-term impact on the spot market.
Under such supply and demand conditions, our current basic judgment is that the existing inventory is low and the spot basis is low. The monthly difference is very strong, and at the same time, in the second half of the year, we are still facing a pattern of destocking 1 to 3 million barrels per day. The average for the two quarters was approximately 2 million barrels per day. In other words, the current inventory is low, demand is good, and supply is waiting to match. Or in other words, OPEC must increase production.
So how much will OPEC increase? This is very critical to the balance sheet. At present, considering that Iran still has the ability to increase production by 500,000-1.5 million barrels per day, Saudi Arabia will definitely leave some room to prevent a sharp collapse in prices, so we estimate that the increase in production will be around 1 million barrels per day (starting in August) ), and�At present, this range may not be enough to cover demand, which means that oil prices are still not easy to fall.
There is one crucial point outside of Saudi Arabia. We must pay attention to the fact that Russia has begun to be a little turbulent in the past few months and is trying to increase production. This means that there may be discordant voices in subsequent OPEC meetings. out, causing huge fluctuations in the market. For example, there may be situations where Russia increases production on its own and tests Saudi Arabia’s attitude. These will put pressure on the current high oil prices.
Finally, let’s discuss the issue of shale oil and the super cycle. First of all, demand is certain, and OPEC is certain to take advantage of the trend to increase production. If this year is so conservative and only 1 million or 2 million barrels per day will be returned in the future, then there will be millions more barrels of production waiting to come back next year. The current market expectation is that demand will increase by 3 million barrels per day in 2022, and shale oil will then make up for 1.5 million barrels per day, which means that there is not much room left for OPEC. So we think that oil prices still do not have the potential to rise sharply due to long-term supply tightening. Instead, there will be some risks, that is, OPEC is not satisfied with the increase in shale oil production, so it preempts its own increase in production, leading to a fall in oil prices.
To sum up, we feel that because the supply side is very conservative and bullish, the extent of demand fulfillment may still exceed expectations. At present, it can be said that the fundamentals, expectations and spread structure are all At its best, it is still in a bullish environment, but generally speaking, the turning point may be between the third and fourth quarters. Mainly based on 1) the profits will be exhausted after the demand is realized. 2) On the supply side, with the development of shale oil, differences within OPEC will increase. 3) The turning point of market liquidity appears, and money is no longer so loose. 4) Inflation in the United States is already very high, and the pressure will be greater when it exceeds US$80. Refer to the situation in 2018. </p
