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What is the next tipping point in the crude oil market after the roller coaster?
Jul 27,2020 08:13CST
translation
Source:Futures daily
The content below was translated by Tencent automatically for reference.

SMM: the crude oil market will light the light of hope for you when you are helpless, and will extinguish it with a basin of water when you look forward to it the most. Last week's crude oil market made us feel the disappointment after hope. Crude oil prices rose sharply last Tuesday under the dual stimulation of successful vaccine development in the United States and the European recovery Fund, successfully breaking through the oscillating platform and climbing upward.

The good times did not last long, and the strong pattern did not last long. After the emotional stimulation, the market entered the oscillatory market with very low volatility, and the price followed the US stock market wobbly again into the previous oscillation range. As of Friday's close, Brent prices were up 0.74%. WTI prices were up 1.4%.

In the current crude oil market, the strong logic that can cause volatility has been reflected in prices, including the benefits of OPEC+ production reduction, the significant progress made in vaccines, and the flooding policies of various countries to stimulate the economy. At present, none of this news can push up oil prices further. In fact, the reason is very simple: the epidemic is still so serious, and the economic recovery has not reached the desired level. under such circumstances, the United States is still "throwing the pot" at the source of the epidemic, and achieving the goal of winning over voters by suppressing China, regardless of the outbreak in the United States.

In the absence of this main logic, crude oil has begun to follow the trend of US stocks, and the recent rise and fall is basically synchronized with US stocks, and it can also be understood that the crude oil industry or speculative investors have partially left the market. at present, more macro funds are allocating assets in the market, which leads to the financial market being more in the stage of allocation rather than the stage of starting the market.

At present, there is still no big mainline logic for future market variables. As trading volume and positions continue to shrink, it is very difficult for funds to find opportunities for full participation. Therefore, in the short term, we seem to have to continue to wait for the possible tipping point of the market to emerge. This tipping point may be another huge good news from the vaccine, or it may also be a further escalation of friction between China and the United States. In short, before the market is clear, it is recommended to operate with caution.

There are variables in the American market.

In the EIA data released last week, there was a long-lost variable that US crude oil production actually increased by 100000 barrels per day. If it is calculated according to the cost theory, the current price position is just near the cost line, and the shale oil producers will not make much profit. Recently, we have also seen frequently the news of the bankruptcy of upstream and downstream shale oil companies in the United States, which is very telling.

We speculate that the increase in crude oil production in this period may be due to two factors: first, the use of some low-cost oilfields, and oil prices have enabled them to generate meagre profits in their current position; second, some shale oil companies on the verge of bankruptcy are facing cash flow pressure and have to invest in some inventory wells to maintain cash flow. If this is the first case, then in fact, there is no need to worry too much. Under the current oil price, shale oil does not have enough power to significantly increase production, even if the increase is relatively limited; if it is the second case, we should observe the persistence of the increase.

In any case, the current decline in U. S. crude oil to the recovery, is an obvious variable, this variable is enough to affect the global supply. In the period of low oil prices, the efficiency of OPEC+ production reduction is higher, an important factor is that the global prisoner's dilemma does not exist, while OPEC+ production is greatly reduced, it will not worry about seizing the market due to the increase of production in some countries. If production in the United States continues to increase, it will intensify the prisoner's dilemma and is not conducive to the good implementation of the production reduction agreement.

In addition, there has been a slight decline in US refinery imports and operating rates, with US crude oil inventories increasing by nearly 5 million barrels, gasoline stocks down by 1.8 million barrels, and refined oil stocks by 1 million barrels, all of which indicate that demand in the US market is not as good as expected. In addition, the epidemic in the United States is so serious that last Friday, the number of new confirmed cases reached 69000, and the cumulative number of confirmed cases exceeded 4.1 million. It can be said that there is no prospect of a full recovery of the US economy. Under such circumstances, macro worries will restrict the upward pace of oil prices.

Apart from the United States, the epidemic situation in Brazil and India is also not optimistic. These three countries are the only countries in the world with a cumulative total of more than 1 million confirmed cases, and they are also countries with more than 45000 new cases in a single day. Brazil hit a new high of 62000 last week, and India hit a new high in a row.

The demand of the Chinese market should be treated with caution.

At present, only the Chinese market can afford the engine function. China's GDP grew by 3.2% in the second quarter, and economic growth began to change from negative to positive. Compared with other countries, other countries are still in the quagmire of negative growth, so the demand side of crude oil still needs to keep an eye on China. But the problem now is that in the case of such a serious epidemic, international trade has been seriously affected, and even if China outshines others, it is impossible for China to comprehensively stimulate the growth of the global economy, and when exports are facing shrinking, China's economy is bound to be greatly affected, so the logic goes back to the control of the global epidemic.

At the same time, the international environment is not a favorable side for us, the game between China and the United States is still going on, and the confrontation between the two countries shows no sign of easing. China is already preparing to start the internal circulation process, the international environment is not optimistic, the international economic environment is even worse.

We are not bearish on the Chinese market, but after the over-purchase in the first half of the year, how much room for purchase in the future is open to question. From the perspective of China's crude oil imports, China's imports broke out in May and June, and the corresponding period coincided with the collapse in prices. China took advantage of low oil prices to purchase a large number of low-priced goods, which is also the reason for the sudden outbreak of imports in May and June. But in fact, we know that the outbreak in May and June consumed the future market demand ahead of time.

The third batch of crude oil imports allowed for non-state trade will be issued in 2020, totaling 26.84 million tons, an increase of 108 per cent over the third batch in 2019. The third batch of distribution is a supplement to the first two batches. After adding up this quota, the import quota of crude oil non-state trade in 2020 totaled 184.55 million tons, an increase of 11.17% over the total quota in 2019.

In addition to the hoarding of low oil prices, China's crude oil demand is indeed growing by leaps and bounds, with both independent and main refineries operating at full capacity, with refinery operating rates reaching new highs in recent years. Such a high operating rate has a lot to do with China's economic recovery, as well as high refining profits some time ago. But recently we have seen that as a result of heavy rains in the south, diesel refining profits have fallen to a new low in nearly three years, gasoline profits have rebounded from lows, and the price has rebounded seasonally.

As far as we know, at present, most of the crude oil import quotas of independent refineries in the first half of the year have been used up. Although there was an increase of 2684 tons in the third quarter, it is far from enough compared with the procurement scale in the first half of the year. Therefore, the future quota will become a major factor restricting the procurement of the refinery. In addition, the decline in refining profits will also restrict the start-up enthusiasm of refineries, so it can be predicted that China's crude oil processing volume and procurement volume will slow down in the second half of the year.

From a fundamental point of view, this is a favorable period for the multi-hair power of crude oil. the more we delay, the more disadvantageous the fundamentals are for the bulls. When the epidemic is not under control, we do not expect demand to recover very quickly. On the contrary, we are beginning to worry about the global demand for crude oil. After China's spot crude oil is overbought, it may enter a period of deceleration in demand for some time in the future, while epidemics in the United States, India, Brazil and other countries are still developing, even if there is a significant release of liquidity. the market is also not so strong to take on, which leads to the idling of financial assets and does not fully flow to physical enterprises.

At present, the price of crude oil is still in the fluctuating market, there is no obvious long-short logic in the market, and the relative caution of funds makes the volatility of oil prices decline. The only thing we can do now seems to be to wait for obvious long-short logic or obvious breakthroughs in the market before entering the market.

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