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.
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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
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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
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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.
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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.