Since the end of July, international crude oil prices have continued to fall, with the October contract of the NYMEX WTI crude oil futures active contract falling from the year’s high of US$74.77/barrel to around US$65/barrel. We believe that with the spread of the global Delta variant virus, the global economic recovery momentum will slow down and the rebound in crude oil demand will be interrupted, while supply will continue to rebound. Under China’s implementation of the “dual carbon” policy, demand for crude oil imports has cooled. In addition, the expectation of tightening liquidity caused by the Federal Reserve’s reduction in QE also puts pressure on the crude oil market.
The spread of the Delta variant virus will affect the demand for crude oil
In the United States, the spread of the Delta variant virus Due to the spread of the disease, the number of new COVID-19 cases in the United States has exceeded 100,000 in a single day for many days. COVID-19 hospitalizations have surged in many states. Some states and cities have reinstated mask requirements and other restrictions. In addition, high inflation has also dragged down U.S. consumption growth, thereby affecting U.S. crude oil consumption.
According to data released by the U.S. Energy Information Administration (EIA), U.S. oil consumption dropped to 18.1 million barrels per day in 2020, the lowest level in 25 years. Lockdowns and other measures to contain the coronavirus across the U.S. are largely responsible for the drop in oil consumption, particularly in the transportation sector, where consumption of gasoline, diesel and jet fuel has fallen sharply. As the most consumed petroleum product in the United States, automobile gasoline consumption fell 14% last year to 8 million barrels per day, the lowest level since 1997. Last year, gasoline accounted for 44% of total U.S. petroleum consumption. The transportation sector accounts for 96% of automobile gasoline consumption, with the industrial and commercial sectors consuming the remainder.
In addition, the Delta variant virus is currently spreading widely in Asia. Major Asia-Pacific countries have all been hit by the virus. Taking South Korea, Japan, and Australia as examples, the number of confirmed cases in the three countries has increased exponentially in the past month, which will cause a short-term impact on crude oil demand in Asia.
As the spread of the Delta variant virus impacts demand in major oil consuming countries, the International Energy Agency (IEA) sharply lowered its global oil demand forecast for the rest of this year in its latest monthly report. Demand expectations for the second half of this year have been cut by more than 500,000 barrels per day, while a new surplus is expected to emerge in 2022.
Judging from crude oil demand data, as of the end of the second quarter of 2021, global crude oil demand has not returned to pre-epidemic levels. During the epidemic in the first half of 2020, many offshore floating tanks were used to store oil, causing crude oil prices to fall into negative territory. It was not until the first half of 2021 that these floating oil storages were gradually digested and U.S. crude oil commercial inventories returned to pre-epidemic levels. Data show that as of August 6, U.S. crude oil commercial inventories were 439 million barrels, which is almost the same as the 440 million barrels before the epidemic. In addition, as of the end of April 2021, OECD crude oil inventories were 4.46 billion barrels, which was approximately 4.41 billion barrels before the epidemic.
The “dual carbon” policy will lead to a cooling of China’s crude oil demand
On the one hand, economic growth The slowdown, especially the fall in demand for industrial and automotive refined oil products, has led to four consecutive months of negative growth in China’s crude oil imports since April 2021. The shrinkage is mainly in private refineries. In April this year, the Chinese government conducted its first inspection of private refineries and found that some private refineries were using crude oil import quotas to trade, including selling quotas to unregistered companies that process imported crude oil. In response, the Chinese government reduced the second batch of quotas issued in June and cut crude oil imports. Data show that the second batch of non-state trade import quotas for crude oil in 2021 is 35.24 million tons, a significant decrease of 35% from the second batch of 53.88 million tons last year.
Under the policy background of carbon neutrality and carbon peaking, China is committed to reducing the proportion of fossil fuels. Under the vision of carbon neutrality, the proportion of new energy sources in China’s energy structure will continue to expand in the future, and petrochemical companies will be committed to developing natural gas and hydrogen energy to replace oil consumption.
Crude oil supply will resume “more blooms” in the future
First of all, the scale of OPEC production cuts will continue to shrink , and finally lifted the production reduction agreement. OPEC+ previously implemented a historic production reduction on May 1, 2020. The scale of the production reduction was gradually reduced from 9.7 million barrels per day from May to June 2020 to 5.8 million barrels per day. At the ministerial meeting on July 18, the major oil-producing countries finally reached an agreement on a production increase plan. OPEC+ agreed to the UAE’s new crude oil production reduction baseline of 3.5 million barrels per day, and adjusted the baseline oil production of Saudi Arabia and Russia to 11.5 million barrels per day. day. Other OPEC+ members also received new production reduction baselines. The production baselines of Iraq and Kuwait were increased by 150,000 barrels per day respectively, and the total baseline increase will be 1.63 million barrels per day. They strive to fully end production reductions by September 2022.
According to OPEC monthly report data, in July, OPEC crude oil production has risen to 26.657 million barrels per day. After reaching an agreement to reduce production in May last year, OPEC crude oil production fell in June last year. To 22.243 million barrels per day, OPEC crude oil production has increased by 19.8% from last year’s low.
Secondly, it is worth noting whether Iran will return to the international crude oil market. In the Iranian general election on June 18, 2021, Iranian conservative Raisi was elected as the new president with a high vote. Iran is expected to return to nuclear agreement negotiations. Once Iran returns to the international crude oil market, the crude oil supply in the Middle East will be reduced.��Add an important strength. Data shows that in July 2021, Iran’s crude oil production was 2.485 million barrels per day, reaching 3.8 million barrels per day at its peak.
US shale oil output is also showing signs of recovery. According to data released by energy services company Baker Hughes, the number of active oil rigs in the United States increased by 10 in the week of August 13 to 397, the most since April 2020. It dropped to 172 in the same period last year. OPEC’s latest monthly report predicts that U.S. shale oil production will increase by 560,000 barrels per day in 2022 after shrinking in 2021, which is 60,000 barrels per day higher than last month’s forecast.
Finally, we believe that the Fed’s taper is getting closer, which will lead to a tightening of US dollar liquidity, thereby cooling investment demand for crude oil. At the previous Fed interest rate meeting, the Fed hinted that the economy has not yet made significant progress while not allowing inflation to continue to be much higher than 2%. This means that the Fed may have to take action in September due to the US core CPI since April. After continuing to be above 2%, the average inflation rate in the United States has approached 3%. From a historical perspective, for example, from 2018 to 2019, the global crude oil surplus accounted for about 6% of consumption. However, crude oil prices still fell sharply, mainly due to the monetary tightening effect of the Federal Reserve’s interest rate hikes.
Micro crude oil futures help manage positions flexibly
We believe In the future, supply and demand in the international crude oil market may reverse, especially as destocking may turn into overstocking, which will lead to a certain downward risk in oil prices. Investors can use the newly launched micro WTI crude oil futures (MCL) of CME Group, or the previous energy crude oil Futures hedge risk. CME Group’s WTI crude oil futures is one of the most liquid crude oil contracts in the world. However, for some active small investors, the margin requirements for WTI crude oil futures are often too high, so they are mainly used as hedging tools for institutions. CME Group launched micro WTI crude oil futures in mid-July. The contract size is only one-tenth of the benchmark WTI futures contract, which can meet investors’ lower margin requirements and obtain the same price discovery function as traditional WTI futures.
CME data shows that the trading volume of micro WTI crude oil futures has exceeded 1 million contracts in the first 20 trading days, of which 29% of the trading volume was traded in non-U.S. time, it can be seen that the liquidity of this new product cannot be ignored. On the basis of the benchmark WTI crude oil futures, there are now micro WTI crude oil futures. For managing crude oil risk exposure, investors can choose the contract size that best meets their investment goals as needed, and when market conditions change or the peak demand season approaches, By swapping positions, the operation becomes more precise and flexible. </p
