A new round of cyclical downward trend in oil prices has formed since mid-March and entered a downward channel. Most of the topics that can affect oil prices in April are negative, which is in line with the needs of public opinion in the market dominated by short sellers in the coming period. Oil prices will continue to drop under the influence of these topics.
If open positions remain basically stable in the future, (WTI) oil prices may continue to fall from the current (weekly average price) of $60 It bottomed out near $55.
Hot question 1: Since mid-March, oil prices have turned downward. How to evaluate the price trend during this period?
Zhong Jian: As the author expected in the previous article ([Oil Market Half-Month Talk] Where is the key point in the market outlook for the recent rapid rise in oil prices? 2021.03. 16), if no new funds enter, the high point of this round of oil prices will remain stable (WTI) around $65. Sure enough, after mid-March, because the position funds did not increase but were reduced, when the oil price climbed to (weekly average price) 65 US dollars, it reached its high point and entered the next two weeks. its downward channel.
In the week of March 26, oil prices fell to (weekly average price) US$60, a decrease of 8% and remained stable for more than two weeks, marking a round of A cyclical downward trend has been steadily formed (see Figure 1).
Figure 1. Weekly average international oil price (WTI)
Data source: Zhuochuang Information Compilation
Hot Issue 2: What caused this round of What are the factors driving the price down? Will it continue to have an impact on future oil prices?
Zhong Jian: Every day when oil price fluctuations are reported, there will be a piece of news that contributes to oil price fluctuations. Regardless of whether this news is objective or not, it at least shows that the market The mainstream public opinion is the subject matter (event) for major traders to speculate on oil prices. Studying and judging the impact and life cycle of these themes on oil prices is also a perspective for judging the trend of oil prices. It is also in line with our theme research and judgment principle that “recent themes are the short-term operating trends of fundamentals”.
By tracking the themes that caused significant fluctuations in oil prices in the second half of March, it can be seen that on the way down, the blockage of the Suez Canal disrupted the decline in oil prices. In the few days after the 24th, due to the blockage of the Suez Canal, a cumulative increase of nearly 6 US dollars was formed, which pushed the oil price that once fell to 57 US dollars back to above 60 US dollars.
At the same time, the epidemic in Europe was the subject of pressure on oil prices. In the early stage, France, Italy, Hungary, Poland, and the Czech Republic all entered a blockade. On March 22, German Chancellor Merkel agreed that Germany would adopt a blockade in early April, which triggered turbulence in oil prices. From March 23 to 31, , the European epidemic has caused a cumulative drop of nearly 8 US dollars (see Table 1).
Table 1. Correspondence table between main themes and oil prices (USD/barrel)
During the period in late March, under the influence of these two themes, oil prices formed a see-saw-like trend around $60. The situation of ups and downs, the blockage of the Suez Canal and concerns about the European epidemic have formed obvious price hedges for oil prices (see Figure 2).
However, judging from the life cycle of the impact of the above two types of topics on oil prices, the obstruction of the Suez Canal is an unexpected topic. With the opening of the canal, this topic will be far away. and concerns about the epidemic in Europe are definitely a continuing theme. As long as vaccines cannot be vaccinated on a large scale, the epidemic theme will be a negative theme for a long period of time.
Figure 2. Daily trend chart of international oil prices (WTI)
Data source: Zhuochuang Information Compilation
Hot Issue 3: Entering April In the future, what other topics will affect oil prices?
Zhong Jian: The OPEC+ meeting in early April will be a subject that will have a certain impact on oil prices. Since the oil price has digested in advance the positive momentum for OPEC+ to continue to maintain substantial production cuts, even if the meeting continues to make production reduction decisions, the boosting effect on oil prices will be extremely limited and short-lived.
You know, in early March, the reason why the oil price was boosted by more than 6 US dollars in total by the OPEC+ decision was because of the “accident” that Saudi Arabia and others did not increase production as expected. A release of emotions, which will not appear at the April meeting.
The subject that has suppressed oil prices is still the European epidemic. After entering April, as the blockade in France and other countries becomes more severe, this will be a theme that some traders can use to carry out negative operations. In particular, some quantitative traders may have included “epidemic” as a keyword in quantitative trading. As long as there are reports of the European epidemic in the market, there may be a short-term “pulse” price.fluctuation. It is expected that after entering April, the European epidemic will frequently suppress oil prices and may once again cause a short-term “pulse” price drop.
In addition to the above two major themes that affect oil prices, trivial themes that have affected oil prices in the early stage may also appear again. For example: changes in the exchange rates of some countries; changes in the U.S. dollar index; changes in U.S. monetary policy; and before late May, the Biden administration may intervene in U.S. gasoline retail prices approaching $4/gallon.
From the above summary, it can be seen that most of the above trivial topics that may enter April will be negative for oil prices, but it is very consistent with the short-term dominance in the future period. Public opinion in the market demands that oil prices will continue to drop under the influence of the above themes.
We mentioned earlier that the concept of “the recent subject matter is the short-term operating trend of fundamentals”, especially in the stage when shorts dominate the market. , negative themes are more likely to be amplified by short traders to amplify their downward effects. Therefore, the negative themes in the recent period should attract our attention and be alert to its fluctuations.
Hot question 4: Can you predict where the bottom price of this round of oil price decline will be? And when will the bottom be formed?
Zhong Jian: There are prerequisites for predicting the turning point of oil prices, which means it needs to be carried out under the scenario of “scenario judgment”. Among them, the most important ones are the scenario conditions based on the principles that “the fluctuation of oil prices is determined by the attitude of position holders” and “the flow of funds driven by the main force’s expectations is a direct factor in the rise and fall of prices.” Therefore, starting from the changes in positions and funds is an important starting point for predicting oil price trends and turning points.
Due to the large adjustment of position funds in the second half of March, open positions were significantly reduced by 200,000 lots within a week, making Corresponding changes have occurred in the relationship between long and short capital allocation, showing the inevitability of the capital level driving oil prices downward. That is, the core logic of why oil prices entered a downward channel after mid-March is the result of adjustments to positions and capital liquidity. In the same way, it is also the logic for judging the formation of the bottom price of oil prices in the future.
If open positions remain basically stable in the future, when long and short funds are allocated to a certain extent, (WTI) oil prices may drop from the current ( The weekly average price) fell to US$60 and closed near US$55, and the corresponding lowest daily trading price was formed in the range of US$54-56.
If there are no emergencies that interfere with the pace of oil prices, the bottom of this round of oil prices may be around late May.
Hot question 5: WTI oil price is used as the target price in the analysis, why not use Brent?
Zhong Jian: I believe that in the international oil market, what can profoundly affect oil prices are a series of “American factors”, such as the U.S. dollar currency issue, the U.S. Supply and demand issues in the market, U.S. geopolitical policy issues in the Middle East, etc. Therefore, it is only in line with the logic of research and judgment to use “American factors” to correspond to U.S. oil (WTI). After all, Brent is just the shadow price of WTI, which can be used at the transaction settlement level. In addition, the price difference between the two oils is generally constant. Recently, adding US$3.5 to the WTI oil price is the Brent price.
Zhong Jian, Chief Energy Officer, Zhuochuang Information Research Institute
Character profile: Mr. Zhong Jian has long been engaged in research on oil macro-policy, oil industry economics, oil market, etc., especially in the analysis of international oil prices. An effective analytical framework and achieved remarkable results.
Approval from relevant national leaders. At the same time, as a member of the refined oil price reform team of the National Development and Reform Commission, he has repeatedly provided professional suggestions for the formulation of my country’s oil price policies and policy reform plans for the petroleum industry, and has repeatedly received affirmative replies from relevant national ministries and commissions.
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