The Oil Market Has Been Hurt

- Mar 16, 2020-

Last week, international oil prices, already weakened by social and public events, were hit hard again. On March 6, OPEC + failed to reach the expected production reduction agreement, and oil prices fell more than 9% that day. However, there were waves again and again. As a response to Russia's refusal to jointly reduce production, Saudi Arabia played a price reduction card, and the market was shaken again. After Black Monday, short-term market confidence cannot be fully repaired.


Blank has not been exhausted


According to BP statistics, China's crude oil consumption in 2018 was 13.522 million barrels per day, accounting for 13% of the global total, while the number of new crown pneumonia cases in North America, Europe, Japan and South Korea increased by 46.636 million barrels per day in 2018. It accounts for 47% of global consumption and almost half of it. On the one hand, public events in society will affect economic growth in stages, thereby suppressing crude oil demand; on the other hand, when transportation, travel and other activities are reduced, the demand for refined oil products will also be suppressed in stages, thereby affecting crude oil demand. Major organizations have also given predictions. OPEC cut its forecast for the first quarter of crude oil demand by 440,000 barrels per day in the February monthly report. Citibank expects that demand growth will decrease by 900,000 barrels per day. Bloomberg predicts that China ’s demand alone will Reduced 3 million barrels / day. This shows that it is a fact that crude oil demand will be greatly affected in the short term.


Saudi starts price war


In the situation where the demand side is affected by social public events, the market has gathered the expected eyes on the supply side. The OPEC + production reduction plan that thought it would inject a pinch of oil into the oil price burst out the "black swan". As Russia finally refused to jointly reduce production, As a result, the original 1.5 million barrels / day production reduction plan failed. At the same time, Saudi Arabia responded with price cuts and production increases, announcing a sharp cut in April's official price, the largest price cut in more than 20 years. According to market news, Saudi Arabia's output next month may exceed 10 million barrels per day, or even reach 12 million barrels per day, while its output this month is 9.7 million barrels per day. Therefore, in the short term, supply-side pressure has become an established fact, which is even worse for the oil market.


Oil price bottom is forming


On the one hand, the long-term oil price below $ 30 / barrel is unwilling to all oil-producing countries; on the other hand, social and public events will eventually improve, with the gradual recovery of demand and the weakening of the marginal impact of the weakening macro economy It is worth looking forward to the underpinnings and stimulus policies in the later period that are good for crude oil demand.


Compared with the analysis of the past ten years, oil prices have fallen sharply three times. For the first time during the 2008 financial crisis, oil prices fell by about 77% in seven months. Subsequently, central banks in various countries took the initiative. Under the support of macro stimulus policies, oil prices were able to stop falling and rebound. For the second time in 2014, the United States set off a shale oil revolution and imposed sanctions on Russia. As a result, the international oil price experienced a 19-month drop, as low as 26.21 US dollars per barrel, which also fell by more than 75%. In 2016, OPEC Oil prices started to rebound after reaching the first production reduction agreement in eight years. For the third time in 2018, in the context of OPEC's production increase, oil prices fell by more than 40% in two months, and then the same OPEC reached a production reduction agreement again and stopped falling. It can be seen that economic underpinning policies and OPEC + production reduction agreements are essential to stop the rebound in oil prices.


In summary, short-term oil prices still have some downward pressure, and domestic oil prices still need to make up for the decline. However, in the medium and long term, demand will improve, and the bottom of oil prices is forming. Changes in the supply side will affect the rebound of oil prices. One is to observe whether OPEC + members can return to the negotiating table, and the other is to pay attention to whether the geopolitical conflict in the Middle East will affect the supply of crude oil.