With OPEC crude oil production declining by 560,000 barrels per day to 30.5 million barrels per day in February, international oil prices began to rebound gradually. WTI crude oil prices broke 57 dollars a barrel again. US President Trump once again called on OPEC to relax its efforts to raise crude oil prices. The contradiction between OPEC+and the United States about oil price is intensifying day by day.

U.S. Oil Faces Internal and Foreign Troubles with Increasing Production

In October 2018, the U.S. SUNRISE crude oil pipeline was put into operation, and the bottleneck of U.S. crude oil transportation has been improved to a certain extent. As a result, U.S. crude oil production continues to increase. Since 2019, U.S. crude oil production has risen steadily, reaching an all-time high of 12.1 million barrels per day in the week of February 22.

However, at this stage, the U.S. crude oil market still faces two problems: one is oil mismatch. Shale oil, as the main source of increasing crude oil production in the United States, produces light crude oil, while medium sulfur crude oil is still the main refinery equipment in the United States. Although heavy and light crude oil can be produced by mixing, the United States still needs to import heavy crude oil to meet domestic demand. Second, capital recovery. High attenuation rate is a major feature of shale oil production. Oil companies mostly maintain production through new drilling, and the capital is mainly supported by Wall Street financing. The book Saudi America by American journalist Bethany McLean reveals the fact that most of the oil companies involved in shale oil exploitation are trapped in increasing oil production, but their cash flow is always negative. Although some large oil companies made profits in 2018, the shale oil industry as a whole still needs to expand its market to maintain its current level.

Since the United States began to export large-scale crude oil in 2015, “energy independence” has become the mainstream trend of the United States. Although the net import of crude oil in the United States has been decreasing, the heavy crude oil in the United States still needs to rely on Canada, Saudi Arabia, Iraq, Venezuela, Mexico and other countries. The dramatic reduction of Venezuela’s crude oil production has also made it difficult for the United States to import heavy crude oil. Meanwhile, Saudi Arabia has cut its heavy crude oil supply to the United States. The decreasing supply of heavy crude oil has further stimulated the sensitivity of the United States to high oil prices. On the other hand, under the circumstances that it is difficult for the United States to adjust the demand of refineries on a large scale in a short period of time, the output of light crude oil is increasing and difficult to digest. As a result, American crude oil is facing the external problems of importing large quantities of heavy crude oil and the internal worries of excess domestic light crude oil.

As a net importer of crude oil, the United States wants to expand its market share in the global crude oil market, but oil prices and transportation costs are major constraints. Therefore, the United States hopes that oil prices will fall further, which will not only alleviate the pressure of domestic oil mismatches, but also bring back funds for oil companies to maintain production, and save costs for purchasing heavy crude oil, so as to obtain greater operating space.

Resolutely Reduce Production and Guarantee Financial Security in Saudi Arabia

As the largest producer among OPEC member countries, Brent oil prices of $65 per barrel at this stage are also unacceptable. Saudi Arabia’s budget increased by 7% to 1.106 trillion rials in 2019, equivalent to about $295 billion. According to the report, in order to maintain the deficit at $35 billion, Saudi Arabia expects to produce an average of 10.2 million barrels per day in 2019 at a price of $80 per barrel. But now production and oil prices are far below Saudi expectations. Saudi Arabia has cut production to 9.8 million barrels per day ahead of schedule in an attempt to further rebound oil prices under the OPEC+cut-off agreement.

In order to maintain oil prices and exports, Saudi Arabia has also made large-scale overseas investment. In February, China Weapons and Panjin Industries signed an agreement with Saudi Arabia and the United States to establish Huajin Ami Petrochemical Co., Ltd. with a total investment of over 69.5 billion yuan. It is expected to start production in 2024. Saudi Arabia is trying to ensure its future crude oil exports by establishing joint refineries overseas. Faced with huge fiscal deficits, Saudi Arabia urgently needs oil prices to rise to more than $80 per barrel, which is also the main reason why it actively calls for OPEC + to further reduce production.

Opinions differ. Russia is hard to choose.

Russia’s attitude towards reducing production is somewhat contradictory. From the repeated discussions on output reduction at OPEC + meeting to the failure of the reduction to reach the agreed scale, all kinds of signs indicate that Russia has been hesitant about the reduction. The president of Rosneft, a Russian oil company, is a typical example of his unwillingness to cut production. He told Russian President Putin that OPEC and non-OPEC production cuts were “in the hands” of the United States. Russia is facing a decline in oil market share. The OPEC agreement is a strategic threat to Russia’s oil industry. The Russian government is more supportive of production cuts. Russian energy minister Nowak said on March 4 that Russia plans to speed up oil production reduction this month and will reduce production by 228,000 barrels per day at the end of this month compared with last October. Putin also made it clear that he believed OPEC + production reduction agreement would help stabilize the oil market.

The core of Russia’s internal disagreement can be attributed to the government’s desire to consolidate its alliance with OPEC, while enterprises are worried about their declining market share. In the face of the fierce US, heating with OPEC is an important means to maintain its market position, but the decline in market share caused by the reduction of production will also cause irreversible harm. Faced with this dilemma, Russia’s attitude will largely affect the future direction of oil market development.

In short, for their own core interests, the United States, Saudi Arabia and Russia, the three major oil producers, have very different expectations for production, of which the contradiction between the United States and Saudi Arabia is almost irreconcilable. As the biggest variable, whether Russia will resolutely reduce production or delay in the future will be the key factor to eventually leverage the oil market. We believe that OPEC + will not discuss further production cuts until the June meeting, before which Russia may continue to maintain a state of “inadequate production cuts”. As a result, WTI oil prices will remain between $53 and $62 a barrel in the next three months, and Brent oil prices will remain between $64 and $72 a barrel.

On March 19, it was reported that the Korean government, while lowering sales tax, would substantially reduce the cost of importing LNG, making its tax amount lower than that of coal, in order to encourage people to switch to cleaner fuels in order to face the worsening air pollution.

Korea’s Ministry of Trade, Industry and Energy has proposed to reduce the surcharge on LNG imported fuel for power generation from the current 24.2 won ($0.02) per kilogram to 3.8 won. The revised tax law will come into force on April 1.

This is expected to boost the use of liquefied natural gas. So far, LNG taxation has been higher than fossil fuels.

Because of its low emission, the environmental cost of LNG is half that of bituminous coal. But the total tax, including special consumption tax, import surcharge tax and customs duty, is 91.4 won, more than twice the 36 won of bituminous coal.

After the special tax exemption in July last year, the reduction of import surcharge of liquefied natural gas will raise the total levy of liquefied natural gas from 23 won to 91.4 won, while the Levy of power coal will rise from 36 won to 46 won.

The government estimates that the new tax will help reduce 427 tons of ultrafine particulate matter per year. Ultrafine particulates are small dust particles with diameter less than 2.5 microns, which are directly absorbed into the blood and pose serious health risks.

LNG used in thermal power plants or cogeneration plants will enjoy full tax rebate, because its energy efficiency is significantly improved, about 30 percentage points higher than that of traditional power plants. From April 1, enterprises with installed capacity of less than 100 MW will reduce tax by 6.9%.

At present, 40% of South Korea’s electricity supply depends on coal. Liquefied natural gas accounts for less than 20%. Nuclear reactors account for 30% and renewable energy sources such as solar, wind and fuel cells account for about 10%.

In the next three years, China’s liquefied petroleum gas (LPG) will show double growth in imports and demand.

On March 21, the 24th China LPG International Conference, co-sponsored by the Guangdong Oil and Gas Chamber of Commerce and the Guangdong Petroleum Society, was held in Suzhou.

“China’s LPG imports are expected to increase to 23-25 million tons in 2021.” Yan Jiasheng, vice president of Donghua Energy Co., Ltd. (002221.SZ), China’s largest LPG importer and distributor, said at the meeting that China’s LPG demand will increase steadily in the next three years with the promotion of the Sixth National Standard Petroleum and the centralized commissioning of the propane dehydrogenation (PDH) cracking unit.

According to his forecast, China’s LPG imports will increase by 20% to 30% in 2021 compared with 2018.

In 2018, as the world’s largest LPG importer, China’s LPG import volume was about 19.16 million tons, up 11.5% year-on-year, accounting for more than 1/3 of the total apparent consumption of LPG.

According to Zhongyu data, in 2018, China produced about 38,005,000 tons of LPG, up 11.2% year-on-year.

LPG, also known as liquefied gas, is a kind of gas that volatilizes during the exploitation of oil, natural gas or the extraction of crude oil. It is a mixture of propane and butane, usually accompanied by a small amount of propylene and butene.

LPG is mainly used for civil fuels, alkane cracking, PDH to propylene and so on. The canned gas used in rural areas and towns is usually LPG.

“At present, the import price of LPG in China is higher than that in other parts of Northeast Asia.” He Yanyu, head of pricing for global NGL (natural gas liquids) at IHS Markit, a global industry information service provider, said that in recent years, the correlation between LPG and global crude oil price fluctuations has been increasing, and the attribute of LPG as a “by-product” of crude oil has been strengthened.

In 2018, Saudi Arabia’s propane exports to China were priced at $540 per ton, an increase of 14.9 per cent over the same period last year.

“The sanctions imposed on Iran will lead to the reduction of LPG exports in the Middle East and a global pattern dominated by LPG supply in North America.” Emma Lamb, chief consultant of NGL Strategy, said that the Asian market was the dominant market for LPG consumption.

In 2018, global LPG supply was 300 million tons, an increase of 3.7% year on year. Depending on abundant crude oil production, the Middle East is the second largest LPG export area after North America.

“In 2019, as the world’s largest exporter of LPG, the impact of the United States on the price and volume of LPG trade will be strengthened day by day.” He Yanyu said that influenced by China’s trade tariff policy with the United States, China has reduced its imports of LPG from the United States. To meet demand, Chinese buyers will choose to buy more Middle East spot goods.

On August 23, 2018, China began imposing a 25% tariff on imports of liquefied gas from the United States.

“The persistence of tariff collection has prompted the collection of LPG’s'exchangeable’market.” Yan Jiasheng said that by exchanging contracts, Chinese LPG importers “transitioned” their original LPG contracts with the United States to other Asian countries such as Japan and South Korea, and sought to buy more LPG from the Middle East, Australia and West Africa.

Demand for polystyrene foam plastics (EPS) in Asia will remain weak in the near future, as China, a key market, stagnates seasonally with sufficient supply.

But because of production losses, regional producers have pushed up prices. Since the end of January, the difference between EPS and styrene monomers has been below the break-even point of $180 per ton.

According to ICIS data, spot EPS prices in China rose further on March 15 compared with last week, with CFR quoting $1,250-1,260 per ton.

Due to the seasonal stagnation of downstream construction industry, China’s demand is particularly tepid, which may keep EPS production at a low level in the coming weeks.

Demand in Southeast Asia is relatively good, and Asian suppliers prefer to sell in the region.

At present, the inventory level of Chinese terminal customers is good, and the EPS supply in the Chinese market is sufficient to meet the demand. It is reported that the operating rate of Chinese manufacturers is about 70%.

ICIS data showed that the EPS premium to styrene monomers fell to a new low of $160 per ton in the week ending March 8, and Asian manufacturers kept operating interest rates low to curb losses.

According to New York Bloomberg News on March 19, American refiners not only buy crude oil to produce gasoline and diesel, but also compete with producers and traders to export shale oil.

Marathon Petroleum Corp. and Philips 66, two of the three largest independent fuel producers in the United States, are entering a boom in shale oil exports. Gary Heminger, chief executive of Marathon Petroleum Corp., said in an interview at a meeting of U.S. fuel and petrochemical manufacturers in San Antonio that he traveled to Singapore and South Korea two weeks ago to find potential customers for U.S. crude oil.

In addition to the Grey Oak Pipeline to Coppers Christie, Texas, which will be completed by the end of the year, the marathon also transports crude oil from the Midwest to New Orleans, where it can be exported through the Louisiana offshore oil port.

At the end of 2018, Philips 66 shipped Bacon Oil from North Dakota to Mexico, defeating trading companies and producers and supplying Mexican Oil Company with the first batch of American crude oil.

1. Supply and demand of China’s HDPE market in 2018

In 2018, the total consumption of HDPE in China was 134.283 million tons, accounting for 44.57% of the total domestic consumption of PE. From the overall distribution of domestic supply and demand, East, North and South China were the main consumption areas of HDPE, while Northeast, Northwest and South China were the main production areas, so the allocation and sales of goods in Northwest and Northeast China were larger. With the development of national policy orientation (urbanization construction, coal to gas, ban on waste, etc.) and medicine, logistics and other industries, domestic demand for HDPE is growing rapidly, and there are large gaps in HDPE film, pipe, hollow and injection moulding. Domestic HDPE output, import and apparent consumption increase year by year.

II. China’s HDPE Consumption Proportion in 2018

In recent years, the downstream consumption of film and sheet materials, injection moulding, pipes and fittings has increased. In the field of film, the vigorous development of e-commerce in recent years has led to the leap-forward growth of express delivery business. People’s daily shopping in e-commerce has gradually changed from easy-to-pack and transport-resistant products (such as clothing, books, etc.) to diversified purchases (such as fragile goods, fresh goods, etc.). The rapid development of express delivery industry promotes the demand of packaging industry and drives the demand of film and sheet materials. With the development of the Internet in China, the With the increasing penetration of e-commerce and Internet and the upgrading of consumption level, there is still room for a substantial increase in the total demand of packaging industry. In the field of injection moulding, with the improvement of residents’consumption level and diversification of demand in recent years, as well as the liberalization of the second child policy and the continuous expansion of population base, people’s demand for daily necessities has been promoted, and the demand for injection moulding has also increased. With the development of urbanization in our country, the demand for PE pipes keeps growing. In recent years, the popularity of heating pipes in residential buildings in northern China, and the promotion and implementation of the policy of “coal to gas” in recent years have greatly promoted the demand for PE pipes, and the demand for pipes has increased significantly.

III. Output of Plastic Products in 2017-2019

From January to February 2019, the output of plastic products decreased significantly compared with previous years. With the increasing supply and shrinking demand in recent years, the imbalance between supply and demand in polyethylene market has become more and more evident, and the prices of HDPE varieties are constantly at a new low point. All kinds of HDPE prices are unavoidable, and the sales situation is gloomy. Businessmen are not in a good mood, and the market continues to mourn. Therefore, in today’s society with the continuous improvement of economic development and consumption level, market demand shows a more high standard and diversification. Only by further developing high-performance products, can we better occupy the market initiative.

From late December to the present three months, the price of potassium sulfate has fallen by 100-200 yuan (ton price, the same below). During this period, the average starting rate of Mannheim potassium sulfate industry is only 50%, which is much lower than 63% of the same period last year. The price of potassium sulfate is basically the same as that of the same period last year, but the price of potassium chloride is about 150 yuan higher. It can be seen that in the past three months, potassium sulfate manufacturers have experienced what. Fortunately, with the formal launch of the spring market, the market of potassium sulfate in some areas has gradually recovered.

According to Zhongfei, some low-end prices in Hebei, Shandong and Northeast China have rebounded slightly in recent days. Not long ago, the actual factory price of 52% water-soluble powder and 50% granular potassium sulfate in Hebei and Northeast China dropped to about 2800 yuan, but now the price of 2850 yuan is not considered by all manufacturers. Some factories whose inventory pressure is obviously relieved and the start-up rate is still low say that they will not take orders for the time being under 2900 yuan.

In addition, the word “export port” has appeared in the market of potassium sulfate. Customs data show that the export volume of potassium sulfate in January was 0.72 million tons, a sharp increase of 1700% compared with the same period last year. Although in fact that amount is still poor, but this growth rate is really shocked, so that the industry for zero tariff potassium sulfate exports generated more yearning. Whether it is 50% powder, 52% water-soluble powder, 50% granule or 50% ball, whether the export price is slightly higher or slightly lower than the domestic price, whether it is directly negotiated or mediated by traders… In short, “Export Port” has been disseminated and discussed by more and more industries, and the export volume has indeed continued to increase (the actual export volume may reach about 100,000 tons in the first quarter), which has played a positive role in the domestic market.

However, while the local low-end price rebound, the high prices in central, southern and southwestern China continue to fall, and the price of potassium sulfate in water-salt system is gradually falling, so it is too early to conclude that potassium sulfate should “rise from the dead”. First of all, demand is not strong, the threat of demand reduction still exists, inventory pressure is only eased, has not really lifted; secondly, the price of potassium chloride still has room to fall, and the overall situation of by-products is slightly better than the previous two years; thirdly, the production of potassium sulfate in water-salt system will be further restored after April; fourthly, although the export volume is considerable, the main benefit is that few exports are located. Advantage manufacturers.

So now we can only say that the market of potassium sulfate has improved, prices at both ends are concentrated in the middle, there is a possibility of stabilization, the pressure to continue to fall in the short term is weakened, and even there may be a partial tightening, rebound, but the overall price recovery is still lacking of strong supporting factors for the time being.

According to Dow Jones, Ole Hansen, an analyst at Sambourg Bank, the global oil market is likely to experience a supply gap of about 500,000 barrels a day in the second quarter of this year after OPEC’s production cuts and oil production declines. However, he said that despite optimistic fundamentals, the current oil price rise may be suspended after climbing to a four-month high. Hansen said that the rise in crude oil prices caused by reduced supply for political purposes could only push oil prices up to levels where global demand might begin to be affected. He believes that Brent and West Texas Medium Oil have strong resistance levels of $70 and $60 per barrel, respectively.

The biggest determinant is demand-side change

A Macroscopic Factor: GDP of Major Global Economies is Downgraded

Global economic expectations are down. In its latest World Economic Outlook, the IMF lowered its expectations for global economic growth, which is expected to grow by 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage points from October 2018, respectively.

U.S. economic data declined, or the year ended. The U.S. economy remained strong in 2018, but economic growth is expected to decline in 2019, after the largest decline in U.S. retail sales in nine years, and the U.S. consumer confidence index began to decline at the beginning of the year. Judging from the latest minutes of the Federal Reserve meeting, most Fed officials are inclined to end their balance sheet reduction plans by the end of this year. There are differences within the Fed over whether to raise interest rates. In addition, the Sino-US trade negotiations have recently sent positive signals that the future trend is optimistic.

The European economy is declining. According to the latest EU forecast, the EU’s overall economic growth is expected to fall from 1.9% to 1.5% this year, from 1.8% to 1.7% next year, and from 0.6% and 0.1% to 1.3% and 1.6% respectively in the euro area this year and next year.

Emerging economies have joined in interest rate cuts. With signs of a slowdown in global economic growth, the monetary policy of multinational central banks has become more moderate, and some emerging economies have joined in interest rate cuts. The central banks of Egypt and India have announced interest rate cuts, while Australia has also issued a “dove” hint that, in view of the current economic situation, interest rate cuts will be the choice of more emerging economies.

U.S. stocks continued to rebound to boost the crude oil market. Since the end of last year, the three major U.S. stock indices have rebounded continuously after bottoming, with an increase of about 20%. This has boosted the trend of crude oil to a certain extent. From historical data, the correlation between U.S. stock and crude oil has remained relatively high. The linkage between crude oil and U.S. stock has been further strengthened in the fourth quarter of last year, and the trend is more synchronous. The sustained rebound of U.S. stock has promoted the rise of crude oil. Obvious. However, as far as the current situation is concerned, the technical resistance of the further rise of US stocks is greater, and the driving force on the trend of crude oil will also be weakened.

B Supply: OPEC and Non-OPEC Supply

OPEC’s supply cut dramatically surplus capacity is higher than that in the second half of 2018

OPEC’s major oil-producing countries have dramatically reduced their production. As of February this year, OPEC crude oil production has dropped to 3054.9 barrels per day, a new low in the past four years. The implementation of production reduction in major oil producing countries has led to a significant decline in OPEC crude oil production. From the implementation of production reduction in oil-producing countries, the implementation rate of production reduction in January and February this year reached 86% and 106%, respectively. Saudi Arabia and Kuwait, the major oil-producing countries, maintained a high implementation rate of production reduction, and the strategy of production reduction will continue to be implemented at least in the first half of this year.

Saudi Arabia, the main producer of the reduction, has drastically reduced its output. Saudi Arabia, as the main force of production reduction, its share of output reduction reaches a quarter of the total output reduction. Therefore, the implementation of output reduction in Saudi Arabia plays a vital role in the final effect of production reduction. In January and February, Saudi Arabia cut its output more than expected, while the country plans to produce about 9.8 million barrels of crude oil a day in March, 500,000 barrels a day lower than the target.

OPEC’s remaining capacity in 2019 is higher than that in the second half of 2018. For a long time, the level of OPEC surplus productivity has a negative correlation with oil price. In the second half of 2018, OPEC’s remaining capacity declined significantly due to the substantial increase of oil-producing countries’production. In 2019, OPEC’s remaining capacity recovered rapidly under the implementation of the reduction agreement. The overall level in 2019 will be higher than that in the second half of 2018, and it is expected that OPEC’s remaining capacity will rise further by 2020.

Currently, oil prices are still lower than the cost of fiscal balance of revenue and expenditure of OPEC’s major oil-producing countries. Most of OPEC’s oil-producing countries need much higher oil prices than current ones to maintain fiscal balance. For example, the oil price of Saudi Arabia, which maintains fiscal balance, is as high as more than $80, while the current oil price is far below that level, and is also lower than the cost of fiscal balance in most countries, reflecting to some extent that some OPEC countries may not be satisfied with the current oil price.

Non-OPEC Supply Originated from the Slow Upstream Investment of American Shale Oil Enterprises

Non-OPEC supply increments still come from the United States. According to statistics from the three major energy agencies, crude oil production in non-OPEC countries increased by about 2 million barrels per day in 2019, mainly from the United States, which accounted for more than 80% of the increase, but the overall growth in 2019 was less than that in 2018. As of March 8, U.S. crude oil production reached 12 million barrels per day, hovering at historic high levels.

There are signs of a slowdown in upstream investment activities of U.S. shale oil companies. The growth of U.S. production still comes from shale oil. At present, the output of the major shale oil producing areas in the United States is still growing as a whole. But we can see some changes. In the data of seven major shale oil producing areas in the United States, unlike the continuous growth of inventory wells, the number of drilling wells and completion wells has declined in the past two weeks. At the same time, we can see that the growth rate of drilling rig data of Beckhughes has declined in the past year. In the last two months, the growth rate has entered a negative range, which is directly related to the fall of oil prices in the earlier period. In the fourth quarter of last year, oil prices fell sharply, which directly led to the slowdown of upstream investment activities. According to the time lag of drilling rigs for about four months, drilling rig data will continue to weaken in the next 1-2 months. But compared with the situation in 2015-2017, the oil price in this period of 2015-2017 was under $50 for a long time, and the production cost of shale oil was higher than the current level at that time. From the fourth quarter of last year to the beginning of this year, the oil price was below $50 per barrel for a short time. At the same time, the production cost of shale oil enterprises has also decreased compared with two years ago, together with drilling. With the improvement of well efficiency and the disturbance of completion and inventory wells, we believe that the decline in oil prices in the fourth quarter of 2018 will probably not lead to a decline in shale oil production in the United States, and the specific impact remains to be assessed.

Domestic oversupply in the United States has set a record for crude oil exports. In 2019, domestic crude oil production in the United States has not stopped growing. In addition, the weakening economy has led to insufficient demand support, and the excess domestic supply has intensified, which can be alleviated through exports. In the week of February 15, US crude oil exports reached 3.6 million barrels a day, setting a new record.

U.S. pipeline capacity will be released in the second half of this year. In 2018, insufficient domestic pipeline capacity in the United States led to the accumulation of regional stockpiles of crude oil, which led to a sharp rise in the price gap between the European and American markets and between the domestic regions. In the second half of last year, the price gap between Brent-WTI crude oil in the European and American markets rose to about $10 per barrel, while the WTI-Midland price gap in the United States rose to a maximum of $17 per barrel. With the increase of pipeline capacity in the United States, this situation will be alleviated. In 2019, the plan of adding new pipelines in the United States is expected to be 2.92 million barrels per day, of which about 90% will be put into operation in the second half of this year. This means that the United States will export more crude oil to the international market in the second half of this year, which will also push the price gap of Brent-WTI crude oil to shrink further.

C Demand: Global Economic Weakness Suppresses Demand

Global crude oil demand growth declines

It is obvious that the weakening of the world’s major crude oil demander countries’economy has an impact on demand. According to historical data, the increase of global crude oil demand is positively correlated with global GDP and oil price, but there are some deviations between the oil price and the high and low points of the former two. The trend of global economy in the next two years will be weaker than in 2018. Accordingly, the growth rate of global crude oil demand will also decline year-on-year. EIA, IEA and OPEC currently forecast global crude oil demand growth in 2019 at 1.45 million barrels per day, 1.4 million barrels per day and 1.24 million barrels per day, respectively.

US economic weakening suppresses crude oil demand

The U.S. economy is weakening and demand growth is limited. The IMF expects US GDP to fall to 2.5% in 2019 from 2.9% in 2018, and agencies’forecasts for US demand growth this year are also lower than in 2018. EIA, IEA and OPEC currently forecast US crude oil demand growth in 2019 at 360,000 barrels per day, 290,000 barrels per day and 260,000 barrels per day, respectively.

Refinery demand will usher in a seasonal inflection point. From the historical data, the current U.S. refinery activity is at a seasonal low, refinery start-up rate and crude oil processing volume are at a stage low position, combined with the seasonal law, these two data indicators will usher in a seasonal inflection point, refinery start-up rate and crude oil processing volume will gradually rise in the latter period, in order to prepare goods in advance for peak season demand.

Gasoline stocks in the United States will weaken seasonally

U.S. gasoline stocks will fall seasonally. As of March 8, U.S. gasoline inventories rose to 449 million barrels, still above the five-year average. Compared with the inventory level in 2018, U.S. gasoline inventories increased in 2019. As the weather gradually warms up, U.S. gasoline consumption and inventories will usher in a turning point. Gasoline demand will increase and inventories will decline. It is noteworthy that in recent years, crude oil stocks in Kuxin area of the United States have continued to rise. The growth of domestic production and inadequate pipeline capacity have led to the continuous accumulation of domestic stocks. The pressure on WTI crude oil from Kuxin stocks is also obvious.

OECD stocks are still above the five-year average. OECD commercial oil stocks reached 2.851 billion barrels in December 2018, 2.5 million barrels per day higher than the five-year average. OECD stocks have risen since the second quarter of 2018, but the range is relatively limited.

D Price Spread Index: Monthly Differentiation

Monthly difference: trend differentiation of crude oil monthly difference

Since February, the monthly difference structure of WTI crude oil and Brent crude oil has been differentiated. WTI crude oil maintains contango structure, while Brent crude oil turns backwardation structure, and this structure is deepening. Influenced by regional supply and demand conditions, Brent crude oil has recently performed better than WTI crude oil as a whole.

Regional Spread: Broad Spread in European and American Markets

Brent-WTI crude oil price gap has widened in recent months. The reason why Brent crude oil is stronger than WTI crude oil lies in the regional supply and demand situation. The continuous growth of domestic production in the United States and the accumulation of Cushing’s stock have suppressed the trend of WTI crude oil, while the non-U.S. market is strong due to the reduction of production in oil producing countries.

In the United States, the WTI-Midland price gap has continued to shrink since September last year. Last year, due to insufficient pipeline capacity, the price gap reached $17. Now the price gap has fallen to near zero. It has returned to a reasonable level. To some extent, it also reflects the improvement of pipeline capacity and the release of regional inventory.

Pyrolysis Price Difference: Conversion of Pyrolysis Strength between Gasoline and Diesel Oil

Recently, whether in the US or European market, the situation of weak price difference of gasoline pyrolysis and strong price difference of diesel oil has changed. The profit of gasoline pyrolysis has risen sharply, while the profit of diesel oil pyrolysis has fallen. With the warming of the weather, the demand for heating oil began to weaken, while the demand for gasoline gradually strengthened, and the corresponding cracking price difference between the two also appeared strong and weak switching.

E conclusion

The weakening global economy has brought long-term repression on the demand side of crude oil and limited the overall volatility of oil prices, which are still dominated by supply-side oil prices in the short and medium term. At present, the supply side is still concerned about the supply changes in the production reduction alliance countries, the growth of shale oil production in the United States and the uncertainty of output in Iran and Venezuela. At present, the situation of output reduction is better than expected, coupled with passive output reduction in some countries, the supply of non-US market is tighter, while the output of the United States continues to increase, but upstream investment activities have slowed down, and the impact on output remains to be assessed.

Overall, we believe that the supply side of the market will remain tight in the second quarter and around the middle of the year, but the marginal effect will decline in the future due to the fact that the good supply tightening has been basically realized in the early period of oil price rise. Although the current oil price still maintains an upward trend, if there is no further favorable supply side, the upward momentum of oil price in the second quarter will be reduced compared with the first quarter. Weak, the current price further upward space is also limited.

Emerging markets are the main force of global LNG demand growth

Natural gas supply in many countries is difficult to meet demand. According to BMI statistics, the top 20 countries in the future will account for more than 75% of the total incremental demand for natural gas. Among these 20 countries, only the United States, Iran and Saudi Arabia can meet their demand for natural gas, so many countries need to import natural gas to meet their domestic demand.

LNG will develop rapidly in emerging markets with its flexibility. LNG is suitable for market areas where pipelines are not accessible or not connected yet. This means that LNG will have great development opportunities in Asia-Pacific, Middle East, Africa and Latin America, where infrastructure construction is relatively backward, such as natural gas pipeline network and gas storage. With the continuous progress of industry technology, LNG will flourish in more small-scale markets. Overall, LNG’s new demand mainly comes from emerging markets such as Bahrain, Croatia, El Salvador, Panama, Ivory Coast, Ghana, Bangladesh and Vietnam. BMI predicts that new LNG receivers in emerging markets will account for about 70% of the global total capacity increment in the next five years.

Floating LNG Receiver Technology and Flexible LNG Contract Promote Global LNG Demand Growth

Floating LNG receiving station reduces LNG import threshold. Technological development has always been a key factor in promoting LNG demand growth in emerging markets. At present, the technology of floating LNG receiving station is developing rapidly, and more and more countries regard it as the preferred LNG receiving station scheme. Floating LNG receiving station is an offshore LNG storage and re-gasification device which integrates the functions of LNG receiving, storage, gasification and transshipment. It has the functions of both LNG carrier and a mobile LNG receiving station. Floating LNG receiving station has the advantages of relatively low cost, short construction period and more flexible gas supply. Many new buyers who lack funds and slow construction of land LNG receiving station choose to import LNG through floating LNG receiving station. BMI predicts that the floating LNG receiving capacity will account for 66% of the global total capacity in the next 10 years, and most of the floating LNG receiving stations will be built in emerging markets.

Flexible contract model promotes LNG demand growth in emerging markets. In the past, LNG long-term trade contracts have been the mainstream of the natural gas industry. However, due to unstable demand for natural gas in emerging markets, large seasonal fluctuations, uncertain long-term demand prospects and relatively lack of funds, the volume of spot, short-term and medium-term LNG trade contracts has increased year by year, and the more flexible contract model of American LNG is also popular. In the future, more flexible LNG supply contracts and mature floating LNG terminal technology will further promote the rapid growth of LNG demand in emerging markets.

Over the next 10 years, LNG demand in Asia, Europe, the Middle East and North Africa will grow steadily, while the prospects for LNG demand in Latin America and the Caribbean and sub-Saharan Africa are not optimistic.

Asia will lead the growth of global LNG market demand. With the increase of economic strength and population, energy demand in emerging markets in Asia is growing rapidly. Under the background that countries pay more attention to environmental protection, natural gas, as a clean energy, will play an important role in the energy structure, such as replacing coal in the field of urban gas and power generation, and oil in the field of transportation. In addition, due to the relatively lagging pipeline infrastructure construction in most emerging markets, they prefer to use LNG to meet local natural gas demand. In order to meet the demand for power generation gas (such as Pakistan), alleviate the decline of domestic natural gas production (such as Indonesia, Bangladesh), and respond to national environmental protection policies (such as India), many Asian countries are actively deploying LNG markets and increasing LNG imports. At present, China is leading the growth of global LNG demand, which accounted for about 50% of the global total growth in 2017. In the next few years, China will continue to be the key driving force for the growth of global natural gas demand and the transformation of pricing mechanism, as well as the most important factor driving the world natural gas market to turn to globalization.

The steady growth of LNG demand in Europe will become the second largest area of LNG receiving capacity increment. Although the utilization rate of LNG receiving stations in Europe is relatively low, its natural gas market is mature, large-scale, highly mobile and competitive. Importing more LNG is conducive to the formation of competition with domestic gas and imported pipeline gas, further improving the level of regional natural gas market competition and increasing the supply of natural gas. Therefore, unlike the new LNG receiving stations built in Asia to meet the new demand, Europe mainly aims to improve the security and flexibility of regional natural gas supply.

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LNG demand in the Middle East and North Africa will continue to expand. Natural gas is the main fuel for power generation in these two regions, so it accounts for a large proportion in the energy structure. With governments restricting crude oil as fuel for power generation and encouraging crude oil export, the dominant position of natural gas in power generation will be further strengthened. However, due to the imperfection of domestic natural gas pricing mechanism and regulatory system, the production of natural gas is limited, which will increase the import of natural gas. In addition, similar to Asia, regional pipeline networks and feeder pipelines in the Middle East and North Africa are lagging behind (especially in the Middle East), and domestic natural gas demand will tend to use LNG.

The prospects for LNG demand in Latin America and the Caribbean are not optimistic. Although the prospects for natural gas demand in Latin America and the Caribbean are good due to the steady development of macro-economy, the increase of per capita electricity consumption, environmental policy support and the government’s desire to reduce its heavy dependence on water and electricity, with the increase of natural gas production in the region and the competition for pipeline gas, the prospects for LNG market are similar to those of smaller markets in Central America and the Caribbean. Not optimistic, imported LNG may be squeezed out of the market.

Sub-Saharan Africa has less demand for LNG. Influenced by the shortage of LNG resources, the lack of stable suppliers, the small and decentralized energy market and the unsatisfactory business environment, it is expected that only Ivory Coast and Ghana will have LNG demand in sub-Saharan Africa. South Africa may import LNG, but the timing is uncertain.