The Rise of Shale Oil Supply and the Superposition of Demand Growth
A Review of the First Half of 2019
In the first half of 2019, SC crude oil futures rose from 380.8 yuan/barrel to 443.5 yuan/barrel, up 16.5%; Brent crude oil futures rose from 54.15 dollars/barrel to 64.55 dollars/barrel, up 19.2%; WTI crude oil futures rose from 45.8 dollars/barrel to 58.2 dollars/barrel, up 27.1%.
Overall, in the first half of 2019, oil prices showed a pattern of rising first and then depressing. Since the beginning of the year, Saudi Arabia has taken the initiative to cut its output excessively, Venezuela’s civil strife has intensified and its output has continued to be cut involuntarily. In addition, the exemption granted by the United States to Iran’s crude oil sanctions is about to expire. The relationship between the United States and Iran has continued to be tense, and the supply side has given strong support to oil prices. At the same time, global economic growth concerns remain, but Sino-US trade is Friction is now easing signs, so that the market’s pessimistic expectations were restored, but also created a favorable environment for oil prices to rise, oil prices once showed strong performance.
In May, the geo-conflict did not deteriorate further. On the contrary, the rising oil price raised the market’s concern about the loosening of OPEC cut-off agreement. In addition, the situation of low start-up of refineries and accumulation of crude oil stocks also appeared in the United States. At the same time, international trade relations were tense, and the increasingly pessimistic economic prospects made the market worried about crude oil demand. Gradually warming up, oil price pressure declined.
Then into June, macro-environment margin improved, geo-conflict events continued, EIA crude oil inventory increased to decrease, oil prices were repaired to a certain extent, and entered the period of oscillation adjustment.
Looking back, in the first half of 2019, the net long positions of WTI and Brent crude oil futures showed a pattern of rising first and then depressing, basically in line with the trend of oil prices. Compared with previous years, the net long positions at the beginning of the year were at the bottom of the five-year interval, close to the extremely pessimistic region, but then all the way back to the five-year interval, and with oil prices in May. The bullish sentiment retreated to the bottom of the five-year interval, and the early bullish squeeze effect further put pressure on oil prices, which also dragged down oil prices.
One of the main lines of B: OPEC + production reduction
The marginal effect of OPEC on production reduction is weakened
On December 7, 2018, OPEC and non-OPEC major oil producers reached an agreement to reduce production by 1.2 million barrels per day from January to June 2019, of which OPEC reduced production by 800,000 barrels per day and non-OPEC reduced production by 400,000 barrels per day. Since February 2019, the implementation rate of OPEC output reduction has exceeded 100%. As of May, the implementation rate of output reduction reached 151%. The implementation of output reduction is good, but it should be noted that in May, Iraq, the United Arab Emirates and Kuwait and other countries have increased production to varying degrees, and there are differences within OPEC.
After weeks of discussion, OPEC + decided to extend the cut for nine months at the just-concluded July meeting and maintain the cut quota set in December last year, with Iran, Libya and Venezuela exempting. Of course, the meeting was different. OPEC changed its previous wording of reducing global crude oil inventories to the five-year average, and said it was seeking to reduce inventories to the 2010-2014 level. Current OECD inventories have fallen below the five-year average, and to meet the new requirements, it will continue to decline by about 240 million barrels, which is also true. OPEC is required to increase its production reduction target in disguised form, but it is difficult to achieve this goal with doubtful binding force on the premise of maintaining the production reduction quota.
Generally speaking, the new agreement can be said to be a lack of novelty. Maintaining the original output reduction quota actually gives those countries with excessive output reduction space to increase production, while maintaining the output reduction itself actually causes the market to worry that OPEC has to reduce production because of poor demand prospects. Under such circumstances, the stimulating effect of production reduction on the oil market is expected to be significantly weaker than in the first half of the year.
Can Saudi Arabia’s Over-cut Continue
Since January 2019, Saudi Arabia has taken the lead in carrying out the task of reducing production beyond expectation. In May, Saudi output has dropped to 9.69 million barrels per day, and the implementation rate of the target of reducing production has further increased to 293%. At present, Saudi Arabia has actually reduced its output by 940,000 barrels per day, with a reduction limit of 320,000 barrels per day and an excess reduction of 620,000 barrels per day. That is to say, Saudi Arabia can increase its output within the reduction limit in the second half of the year, with a maximum increase of 620,000 barrels per day, which can fully compensate for the reduction in crude oil supply caused by sanctions on Iran.
Russia’s lack of momentum to reduce production
Although Russia is the representative of non-OPEC oil producers who actively support the production limitation agreement, in fact, since the beginning of 2019, Russia’s enthusiasm for production reduction has been low. In May alone, it basically achieved the OPEC+production reduction target for the first time, which is due to the pollution of transportation pipelines leading to oil refineries in Eastern and Central Europe. In the second half of the year, with the gradual solution of the oil pipeline pollution problem, this part of the reduction or disappearance, Russia’s demand for market share and the purpose of strategic deployment of the crude oil market will always be the resistance of its strict implementation of production reduction.
C Main Line Two: U.S. -led Oil Market
US crude oil production maintained growth
In the first half of this year, U.S. crude oil production maintained a steady growth momentum, but the growth slowed down. As of the week ending June 28, U.S. crude oil production was 12.2 million barrels per day, an increase of 500,000 barrels per day over the beginning of the year. The monthly report released by EIA on June 11 shows that U.S. crude oil production will increase by 1.36 million barrels per day to 12.32 million barrels per day in 2019, down 140,000 barrels per day from previous estimates, but EIA expects that U.S. crude oil production will increase by 94,000 barrels per day in 2020, up 1,000 barrels per day from previous estimates.
As of the week ending June 28, 793 active drilling rigs in the United States were at a relatively high level in history, while 55.6% in Permian region were at a high level.
Since 2018, DUC (drilled but uncompleted wells) in the United States has shown a large upward trend as a whole, only a slight decline since March 2019. By May 2019, there were more than 8,200 DUCs in the United States. However, in Permian area, DUC has soared to more than 3,900. With the large-scale pipeline production in the second half of 2019, these DUCs, especially It is hoped that DUC in Permian will be switched to completion soon, which means that the further increase of U.S. crude oil production is not far away.
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Starting in June 2018, pipeline transportation in Permian region appeared obvious bottlenecks, and the MEH-Midland price gap once soared, which also stagnated the increase of U.S. crude oil output. Starting in September, the expected production of Sunrise pipeline brought the price gap back to normal, and U.S. crude oil production resumed its growth trend.
In the second half of 2019, the Permian region will usher in a peak of production, with a total increase of 2.64 million barrels per day in pipeline capacity to ports in the United States Bay region, which is expected to exceed the growth of crude oil production in the Permian region in the same period, greatly alleviate the bottleneck of transportation and increase the supply pressure of crude oil from the United States.
In line with the increase in pipeline capacity in major production areas, it is the increase in the export capacity of the United States. At present, the export capacity of American ports is about 4 million barrels per day. According to Bloomberg data, the export capacity of Corpus Christi ports is expected to double to 2.4 million barrels per day this year and increase to 3.2 million barrels per day in 2021. Under the combined effect of pipeline transport bottleneck alleviation and export capacity enhancement, the bottleneck of crude oil export in Permian region has been lifted. This means that the U.S. crude oil export routes to other countries are widened.
Canadian production may recovery
At the end of 2018, transportation bottlenecks led to a discount of nearly $50 for WCS relative to WTI crude oil futures in Canada, triggering subsequent active production cuts in Alberta. In the second half of the year, the government said it would not make a decision on the expansion of Tranmountain before the October 2019 Prime Minister’s election. The expansion plan was put on hold. However, it is gratifying that Enbridge said it planned to increase pipeline capacity by 135,000 barrels per day by the end of the year, partially alleviating the pressure of Canadian capacity and Canada’s crude oil production. Quantity or recovery.
D Main Line 3: Geopolitics
The escalating conflict between the United States and Iraq
In late April 2019, the U.S. government announced that it would no longer exempt eight countries and regions from importing Iranian crude oil. Since then, tensions in the Middle East have intensified. In June, the U.S. Treasury announced sanctions against Iran’s largest petrochemical company, the Persian Gulf Petrochemical Industry Corporation (PGPIC) and its 39 subsidiaries. Iran counteracted mainly by terminating the implementation of some provisions of the Iranian nuclear agreement. Iranian President Ruhani announced that Iran would not sell heavy water and enriched uranium to the outside world, and that Iran would again sell heavy water and enriched uranium. The second resumption of uranium enrichment activities, starting on July 7, raised uranium enrichment to the “required level”, breaking the 3.67% limit of the Iranian nuclear agreement.
As of June 2019, Iranian crude oil production was 2.28 million barrels a day, down 100,000 barrels a day from last month; Iranian crude oil exports fell to 296,000 barrels a day, although not to zero, but India stopped importing Iranian crude oil in May. At present, only China is still importing Iranian crude oil, and the situation of Iranian crude oil exports is not optimistic.
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Iran’s concerns are not limited to its own production. Another core issue is the safety of global crude oil transport. About 35% of the world’s offshore crude oil transportation and 90% of the Persian Gulf’s crude oil output flow through the Strait of Hormuz, through which at least 17 million barrels of crude oil go to China, India, Japan and other places every day. Since June, two oil tankers have been attacked in the Gulf of Oman, followed by the shooting down of U.S. drones over the Strait of Hormuz by Iran. Recently, the British Navy has seized the supertanker Grace I carrying Iranian crude oil, adding up the threat of closing the Strait of Hormuz when Iran was subjected to U.S. sanctions earlier. Recently, the “war insurance premium” has risen rapidly, increasing the cost of crude oil transportation and threatening the safety of global crude oil transportation, which has become one of the main unstable factors facing oil prices in the second half of the year.
Venezuela’s supply decline is hard to reverse in the short term
Venezuela, with crude oil as its core economic pillar, is currently in the midst of a long economic and social crisis. On the one hand, its government is in high debt and its economy is on the verge of collapse; on the other hand, the political situation is turbulent. In January 2019, Guaido, a member of the opposition, named himself “interim president” and won the United States, Canada and several European and Latin American countries. Public support. Affected by this, Venezuela’s large-scale power outages occur frequently, oil tankers and crew are facing shortages. At the same time, many sanctions against Maduro government officials and Venezuela have been implemented, which has caused a significant blow to the production and export of Venezuelan crude oil.
OPEC data show that Venezuela’s output in May has dropped to 741,000 barrels per day, a record low. Since this year, its crude oil exports have also declined significantly. It is noteworthy that the volume of exports to the United States has dropped to zero since February.
Looking ahead, for Venezuela, the uncertainty in the future mainly comes from the change of regime and the lifting of sanctions imposed by the United States, but at present, the recovery of its crude oil production and export still has a long way to go.
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US: Fed Interest Rate Reduction Expectations Warm
Under the influence of trade barriers dominated by U.S. trade policy, U.S. economic data is weak, manufacturing PMI has dropped sharply, output growth has stagnated, consumer demand is insufficient, inflation continues to be weak, unemployment rate has hit the bottom, and core U.S. bond yields are upside down. All these signs suggest that U.S. economic growth will accelerate, significantly. It raised the market’s anxiety about the outlook for the U.S. economy.
On March 22, 2019, the 10-month-3-month Treasury bond yield curve of the United States first appeared inversion in nearly 10 years; on May 23, it fell into inversion again. At its June meeting, the Federal Reserve maintained its existing interest rate unchanged, but lowered its key core inflation expectations. At the same time, it abandoned its previous “patience” wording on future policy adjustments, saying that uncertainty about the future economic outlook had increased and that it was gradually showing an open attitude towards interest rate cuts. The market expected a rate of about 25B in July. P. Combined with our previous analysis of US Treasury spreads, Federal Reserve interest rate policy and US economic cycle, the deterministic increase of global economic slowdown and the weakening of short-term US dollar have boosted oil prices. However, in the medium and long term, the economic and environmental pressures on oil prices remain high, and they are also a major repression on the demand side of crude oil.
Eurozone: Sustained economic downturn
While the manufacturing sector in the euro area remains depressed, the economic boom index is weak, inflation data is at a low level, consumer confidence index is declining, and macroeconomic data in Europe continues to deteriorate, the ECB intends to accelerate the pace of quantitative easing, and the European economy may continue to deteriorate or even fall into partial recession in the future.
Against the background of accelerated global economic slowdown and tense trade situation, the expected rate cuts or implied interest rate cuts by major global central banks further exacerbate market panic, and the global economic resonance slowdown may be unavoidable.
Crude oil demand without immediate concern and foresight
On the demand side, since 2019, owing to the macro-environment turbulence, OPEC, EIA and IEA have continuously lowered their expectations of crude oil demand growth in 2019. Among them, OPEC has lowered the global crude oil demand by 360,000 barrels per day, EIA has lowered the global crude oil demand by 320,000 barrels per day and IEA has lowered by 200,000 barrels per day.
The depot period of crude oil is April-September every year, but in 2019, because the crude oil production of the United States continues to increase substantially and the start-up rate of refineries is lower than that of the same period last year, the depot of crude oil in the United States is delayed. However, in July, with the gradual recovery of the start-up rate of refineries and the seasonal improvement of downstream demand, the depot period of American crude oil stocks is gradually opened. 。 Overall, the peak consumption season in the third quarter formed a short-term support for crude oil demand.
Strategic thinking
Demand warmed seasonally in the third quarter, and global crude oil entered the depot cycle, while the U.S. hurricane season also affected crude oil production. In addition, the Federal Reserve’s short-term interest rate cuts boost the role of short-term deposits, oil prices remain strong in the short term. However, with the lifting of transport bottlenecks, shale oil production and exports in the United States will experience explosive growth. Its negative impact is expected to overwhelm the marginal boost and gradually weaken OPEC+production reduction. In addition, the slowdown of global demand, the intensification of financial market volatility and the drag of risk preference, the pressure of oil price rebound will be greater.
In summary, it is expected that oil prices will rise first and then decrease in the second half of the year. Overall, they will operate in the core areas of WTI crude oil futures of $47-62 per barrel, Brent crude oil futures of $55-70 per barrel and SC crude oil futures of $380-480 per barrel.