Since the beginning of 2019, international crude oil prices have shown a trend of rising first and then depressing. Among them, NYMEX? WTI crude oil futures active contract 1907 hit the bottom on December 24, 2018 ($44.2 per barrel), then hit a high of $66.44 per barrel on April 23, 2019, with a maximum increase of 50.3%. By June 3, 2019, it fell to $52.86 per barrel, down 20.4% from the previous high. ICE Brent crude oil futures active contract reached its bottom on December 26, 2018 ($51.43 per barrel), hit a high of $74.04 per barrel on April 25, 2019, with a maximum increase of 44%. By June 3, 2019, it fell sharply to $60.9 per barrel, down 17.7% from its previous high.
Since May, global crude oil prices have fallen in a waterfall. I believe that there are both supply and demand imbalances and geopolitical factors. On the supply side, although OPEC is still implementing the yield reduction agreement, there is no big gap in global crude oil supply, but there is stock accumulation, mainly non-OPEC production increase and American shale oil production increase and export increase to make up for the supply gap caused by OPEC production reduction in the market.
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On the supply side, according to a Reuters survey, OPEC cut production to 30.17 million barrels per day in May, down 60,000 barrels from April, the lowest since 2015. Although Saudi Arabia has increased production under pressure from US President Trump to suppress oil prices, Saudi Arabia has voluntarily controlled crude oil production below the level stipulated in earlier OPEC supply agreements. Since the United States imposed sanctions on Iran in May 2018, Iran’s crude oil production has fallen by 30%.
According to data released by the Russian Ministry of Energy, Russia’s crude oil production in May dropped from 1.123 million barrels in April to 11.11 million barrels, the lowest level since June 2018. Russia’s oil pipeline exports fell to 4.209 million barrels a day in May from 4.494 million barrels in April, as oil supplies through the Druzhiba pipeline nearly dried up, while maritime exports jumped 11.5%.
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Geopolitical conflicts have also once led to market concerns about supply. Since the beginning of April, the conflict in Libya has continued to heat up. Iran’s crude oil exports continued to decline as a result of U.S. sanctions against Iran. Data show that Iranian crude oil exports fell sharply in May. The IEA said Iran’s crude oil production has now fallen to its lowest level since September 2013 and is likely to fall further to its lowest level since the Iran-Iraq war in the 1980s.
However, more importantly, the increase of crude oil production in the United States, Canada and other countries, especially the double increase of crude oil production and export in the United States, has to some extent eliminated the effect of OPEC production reduction, making the supply and demand of the global crude oil market unbalanced. According to the latest data from the U.S. Energy Information Agency (EIA), the average daily output of crude oil in the United States has reached 12.3 million barrels, making it the world’s largest oil producer.
Other statistics show that Venezuela’s crude oil exports have declined by about 1 million barrels per day since 2017, while Iranian crude oil exports have declined by about 1.3 million barrels per day since 2018 under a new round of U.S. sanctions, while U.S. crude oil exports have almost filled the gap of 2.3 million barrels per day since 2017.
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In terms of inventories, EIA data showed that US commercial crude oil stocks excluding strategic reserves were 476.5 million barrels in the week ending May 24, a slight drop of 0.03 billion barrels from the week ending May 17, but still near the highest level since July 28, 2017. According to common sense, if global crude oil production falls, U.S. crude oil stocks will decline, because the U.S. relieves inventory pressure through crude oil exports, but in fact U.S. crude oil exports are increasing, but inventories continue to rise, which means that the global crude oil market is oversupply.
Statistics show that from January 5, 2007 to the present, U.S. crude oil commercial inventory and the closing price of NYMEX WTI crude oil futures (CL) show a correlation of -0.7. Therefore, the increasing trend of commercial crude oil inventories in the United States is not reversed, and the decline of international crude oil prices is difficult to stop.
In terms of demand, global economic growth prospects are worrying as global trade frictions spread from China and the United States to Mexico, the United States and India. Although China’s crude oil imports reached a record high of 43.73 million tons in April, domestic demand for refined oil was weak, which meant that the increase in imports was mainly due to reserve, not driven by actual demand. In the future, Asian crude oil import demand will cool down, especially in export-oriented countries in Asia, South Korea’s exports dropped by 11% in the first 20 days of May.
From the perspective of multiple factors of future oil price rise, it mainly comes from the uncontrolled situation in Iran, and the unexpected drastic reduction of oil production in Libya and other oil-producing countries due to geo-conflict, resulting in a supply gap that can not be compensated for by the incremental output of shale oil in the United States. Strategically, investors can sell crude oil futures to hedge the downside risk of spot prices, such as the NYMEX WTI crude oil futures contract of Chicago Merchants Institute or the previous crude oil futures contract, in order to prevent the rebound of crude oil prices, they can buy NYMEX WTI crude oil put options.