Does the international oil price still have upward momentum after the deep V reversal?

After a fierce week, I believe that many people have been fooled by the trend of oil prices with a long shadow. The performance of oil prices on July 19 will leave a focus on this year's trend. The collapse performance of 6 US dollars per barrel caught many investors by surprise, and the performance of turning back and pulling up strongly is also amazing.

Oil prices have left a long shadow on the weekly chart, and a weekly volatility of more than 10% is not uncommon in the history of oil prices, but a 10% turnback like this is very rare. The market corrected quickly after the collapse last Monday and recovered all the losses, indicating that the price of oil fell emotionally and irrationally last Monday, so the market quickly corrected its mistakes. In the process, we saw a rapid escape of 60, 000 positions in crude oil last Monday and Tuesday, while there was little significant increase or decrease in funds at the beginning of the rebound, until there was a sharp increase of 35000 positions on Friday. This shows that investors fled from the initial panic to be at a loss in the face of a rapid rebound, and did not re-enter the market until last Friday. This performance allows us to see more clearly the psychological fluctuation process of investors' risk aversion.

With the EIA Weekly report showing that demand in the US market is still strong, dispelling concerns about demand the previous week, global risk appetite has also risen again, US stocks have set new record highs, and copper prices have risen sharply out of decline, oil prices have also pulled back into a strong state again.

Changes in supply and demand

Before the July meeting, the situation of supply shortage was becoming more and more serious. judging from the inventory data, the current rising water structure of the crude oil market and the monthly difference, the market almost consistently judged that OPEC+ would form a new decision to increase production at the July meeting, and the increase was generally expected to be between 50 and 1 million barrels per day, so oil prices immediately refreshed this year's high after the market heard that OPEC+ plans to increase production by 400000 barrels per day. But changes followed, when the United Arab Emirates jumped out and advocated that it should meet the requirements of raising its production base, otherwise it would not agree to the decision to increase production, and the OPEC+ meeting fell into a stalemate, an incident that plagued the market for two weeks and brought great uncertainty to the crude oil market.

The crude oil market was cloudy at the beginning of last week. The market's attention shifted from tightening supply to being optimistic about the consistency of oil prices to great uncertainty on the supply side. Suddenly, the market found that with the rise of oil prices, there was a lot of uncertainty on the supply side in the future. It was obvious that OPEC+ countries had strong motivation to increase production, and differences also arose. Finally, after more than half a month of repeated negotiations, Finally, a new decision to increase production was reached on July 18, and OPEC+ agreed to extend the production reduction agreement until the end of 2022. After Saudi Arabia and the United Arab Emirates settled the dispute hindering the agreement, OPEC and its allies agreed to gradually add more oil to the market, increasing production by 400000 b / d per month until its halted production is fully restored. OPEC+ agreed to a new baseline of 3.5 million b / d for crude oil production reduction in the UAE, an increase of 350000 b / d over the existing base, 150000 b / d each in Iraq and Kuwait, and 50 b / d in Saudi Arabia and Russia. Starting in May 2022, OPEC+ 's total baseline increase in oil production will be 1.63 million barrels per day. Judging from the final increase agreement reached by OPEC+, the increase is quite restrained, and the increase of 400000 b / d is already the minimum increase expected by the market, but over time, the final accumulated supply will also increase by 2 million b / d by the end of this year and 3.6 million b / d when the existing agreement expires in April next year.

In fact, it is not just OPEC+, 's resumption of US shale oil production that has begun to attract market attention. Us crude oil production increased by 300000 b / d to 11.4 million b / d in July, which surprised the market. The number of active drilling rigs in the US increased by seven last week to 387, the highest since April 2020, according to Baker Hughes, an energy services company. Baker Hughes expects 50 additional drilling rigs in North America by the end of this year, believing that global crude oil growth will continue until 2022 and that the North American crude oil market will show additional growth in the second half of the year. Shale oil, which has insufficient production momentum due to the adjustment of business thinking for a long time in the past, is expected to re-increase investment. Schlumberger, the world's largest oil service, believes that the growth rate of crude oil activity in North America will slow, and drilling activity is still likely to grow unexpectedly due to spending by private exploration and production operators. In short, non-OPEC countries, including the United States, will resume crude oil production when oil prices are above $75 a barrel. From the increase in production on the supply side, we can see that although the crude oil market is still likely to be tight in the second half of this year, the tight situation between supply and demand in the crude oil market is expected to be alleviated gradually after the peak demand season.

The increase in supply-side production is not unprepared, but strong expectations of demand are the main reason for the rise in oil prices. As long as demand is strong, the current increase in supply will not affect oil prices to remain strong. OPEC believes that there is a shortage of 1.7 million barrels per day in the crude oil market, and investment banks continue to raise their global crude oil demand expectations and price expectations. However, oil prices begin to weaken as the uncertainty brought about by OPEC+ begins to weaken. At this time, the market begins to worry that the rampant Delta strain may damage the prospects for the recovery of crude oil demand. Investment banks such as Goldman Sachs have begun to expect that a new outbreak caused by the Delta strain could reduce crude oil demand by 1 million barrels a day, and the market is very worried about weak demand, so it will be important for the EIA to report on demand last week. The latest data show that U.S. EIA crude oil stocks increased by 2.107 million barrels in the week ended July 16, expected to decrease by 4.5 million barrels, and the previous value decreased by 7.896 million barrels; gasoline stocks decreased by 121000 barrels, expected to decrease by 1.05 million barrels, and the previous value increased by 1.038 million barrels; refined oil stocks decreased by 1.349 million barrels, expected to increase by 650000 barrels, and the previous value increased by 3.657 million barrels; exports decreased by 1.562 million barrels per day to 2.463 million barrels per day; Crude oil production decreased by 10 million barrels per day to 11.4 million barrels per day; imports of 7.097 million barrels per day, an increase of 876000 barrels per day over the previous week. From the US to Asia to Europe, fuel demand and road traffic remain strong, supporting expectations that the economic recovery is not derailed and that global inventories will continue to shrink. The latest US crude oil market data show that demand is still strong, which dispels market concerns about demand.

Macro and epidemic situation

Global risk appetite has rebounded rapidly, typical of which is the sharp fall in precious metals. The strong performance of the recently released macro data can be attributed to the record high of US stocks and the sharp rise in copper.

The IHS Markit euro zone composite purchasing managers' index (PMI) for July climbed to 60.6 from 59.5 the previous month, the highest level since July 2000. The index is still above the 50 dividing line and above the 60.0 forecast by survey analysts. Chris Williamson, chief business economist at IHS Markit, said: "the euro zone is enjoying rapid economic growth in the summer, and the relaxation of anti-epidemic restrictions in July pushed the economy to grow at its fastest pace in 21 years. The service industry is enjoying the freedom brought about by deregulation of epidemic prevention restrictions and increased vaccination rates, especially in hospitality, travel and tourism. " Demand is advancing rapidly, suggesting that this pace will not slow down any time soon. The new business index rose to 59.7 from 58.7, one of the highest in the survey's 23-year history.

The initial PMI of Markit manufacturing in the United States recorded 63.1 in July, the highest level since the data were recorded, while the initial PMI of Markit service industry was 59.8, much lower than market expectations. Williamson, chief business economist at IHS Markit, said the initial PMI figures for July showed that US economic growth slowed for the second month in a row, although the slowdown came after unprecedented growth in May. After the reopening of the economy, growth in the services sector is likely to slow and, more importantly, both manufacturing and services have achieved strong growth.

In order to ensure economic recovery, the United States and Europe will continue to maintain loose monetary conditions. European Central Bank President Christine Lagarde said last Thursday that he would not withdraw emergency support prematurely so as not to undermine the economic recovery. While the ECB sent a dovish message, the next focus of the market was the Fed policy meeting. At the last meeting on June 16, Fed officials no longer used the phrase that the novel coronavirus epidemic put pressure on the economy, but the number of cases has risen sharply since then. However, many analysts still expect the meeting to further discuss reducing stimulus.

Us Treasury Secretary Yellen has warned that if Congress fails to raise or suspend the debt ceiling by August 1, the Treasury Department will not be able to predict how long it will be able to avoid a potential default on its national debt. At that time, the United States may not be able to pay its government debt in full on time, with disastrous consequences. Ms Yellen said the risk of default on government bonds alone could damage the country's fiscal position. She cited the decision of international rating agencies to downgrade the US credit rating during the 2011 debt ceiling impasse. It is reported that the US Treasury has taken extraordinary measures to avoid default, but Yellen said that the difficulties caused by the novel coronavirus epidemic have limited the efforts of the US Treasury. Earlier, the Congressional Budget Office said the US could default on its debt in October or November unless Congress raised or suspended the debt ceiling.

As of 19:00 local time on July 23, according to data released by the Brazilian Ministry of Health, there were 108732 more cases than the previous day; Indonesia had 50, 000 new confirmed cases; France had a total of 5.95 million confirmed cases, and experts warned that the number of new cases could reach 50, 000 in a single day at the beginning of August. In addition, the epidemic is growing almost all over the world, and the Delta strain is still raging around the world. So far, the new outbreak has mainly affected unvaccinated people. However, considering that although the spread of the epidemic has accelerated, there has been no significant increase in severity and mortality, and it will take time to further assess the lethality of the Delta strain, as the epidemic continues to spread. we will learn more about the impact on people who have already been vaccinated. The general consensus is that consumption, travel and business activities will only be slightly affected. Even at the end of last year, when a new outbreak broke out in the United States, the economic recovery continued. So far, economists have maintained predictions of a historically strong recovery in the global economy, and a key factor in their confidence is that governments are unlikely to impose an anti-epidemic blockade again. And most consumers will not fundamentally change their spending plans. If this view changes, the outlook will also become unpredictable.

Taken together, the positive factors reached at the OPEC+ meeting on July 18 will continue to play a role in the coming period. OPEC, led by Saudi Arabia, insists on more restrained production on the supply side to ensure the continuation of supply shortages in the crude oil market this year, which means that it is difficult for oil prices to continue to fall unilaterally. If market risk appetite continues to pick up, oil prices are still more likely to hit $80 a barrel. But at the same time, we have also seen the power of the Delta strain. Although many people already think that novel coronavirus is moving towards influenza, the epidemic will still haunt the market from time to time before it reaches its peak, and whether demand can remain strong is also a factor that needs to be paid attention to next. We need to clearly recognize that the continued increase in the supply side at the later stage is a deterministic factor, which will also continue to narrow the gap with demand, and market sentiment may cool down at any time. Therefore, while strongly looking forward to the future oil prices, we also need to pay close attention to the impact of relevant variables on oil prices.