Crude oil fell 9% in July, the chemical industry fell miserably, and the oil product over-fall can be repaired?

Guide

Huang Wanzhe: Head of the Energy and Carbon Neutrality Group of Dadi Futures, mainly responsible for the research and analysis of crude oil and oil products. Graduated from the University of Leeds in United Kingdom with a master's degree, he has a strong financial background and is good at understanding the market and the mentality of participants through framework thinking. Rooted in fundamental research, we actively dig into the details, clearly grasp the main contradictions at different stages and analyze them.

Core view: We believe that in the process of macro sentiment stabilization and repair, the fundamentals of oil are still relatively good. The performance of the peak season is neutral and strong, and there should be a repair rebound. Because the destocking is carried out, the spot is also very strong. The cracking of the oil has stabilized and will not be used as a negative feedback to the oil for the time being.

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WTI weighted daily timeframe

This article comes from the sharing content about oil products in the live broadcast of "Niu Zhuan Qiankun" on the evening of 07.28.

Judging from the overall trend, crude oil in July should have been in the stage of cashing in the peak season, but there was a sharp decline, and the main contradiction is that there has been a relatively large split between the macro and the fundamentals.

[1. Macro]

Entering July, commodities showed a weak recession-like resonance trade. The logic of the main line is first to verify that the economic data of the United States has further weakened marginally, such as inflation falling more than expected, non-agricultural data is less than expected, etc., the logic of interest rate cut expectations in September has been strengthened, commodity sentiment has taken a significant turn, and the market risk aversion sentiment has increased significantly.

The yen, as a safe-haven currency, has been strengthening since July 9, and at the same stage, the overall trend of crude oil and copper has been downward, and the Nasdaq index has also fallen sharply, exacerbating the pessimism of the market. The weak macro logic trading continued until Thursday (7.25), when the United States Q2 GDP data was released, and after the unexpected reaction, the market showed a more obvious buffer mood. During the day, gold began to retreat, and crude oil and copper stabilized and rebounded during the day.

Therefore, in the short term, the macro is showing signs of stabilization, and the market is beginning to expect a possible over-falling repair market in the future.

[2. Trump's trading market]

During July, there was also a more obvious main line logic, that is, the market of Trump's trade.

Markets are starting to price in a significant increase in the probability of Trump returning to the White House. According to Trump or according to the Republican Party's campaign policy, the long-term logic must be weak and inflationary, the main supporting logic is that Trump seeks to return to manufacturing and strengthen the control of illegal immigration, United States structural labor problems may recur, and the tight labor supply will push up endogenous inflation again.

For oil, there are two aspects to short-term market trading:

First, after Trump's shooting, there was a more pronounced risk-off trade in the market.

Second, for oil, seeing Trump in office in the short cycle is bearish for oil prices. There are two main policy guidelines:

The first is that Trump's policy is biased towards low oil prices, because he needs lower oil prices to support low inflation. Trump supports the policy of energy independence, vigorously develops the country's shale oil, and circumvents the green and clean energy policies pursued by Biden or the Democratic Party.

At the same time, there is a policy of price bias, and Trump's attitude towards Iran is tight. If he comes to power, he will once again jam Iran's crude oil production and exports, which will further force Iran's domestic upstream to reduce production.

Therefore, when the Trump trade heats up, the downward pressure on the crude oil side is still relatively large.

[3. Fundamentals]

In this period of macro-dominated downward market, copper, as a relatively sensitive class of assets, fell very smoothly, on the other hand, oil fell more repeatedly, mainly due to the strong performance of fundamentals, mainly the strength of spot and WTI forced positions to stop the market.

First of all, let's look at the spot support, in mid-to-late June, the North Sea was swept up, and the main buyers were Gunwo and Trafigura. In early July, the trading volume level declined, but the transaction premium was relatively high.

Since the premium in Beihai was topped in June, it has been maintained at a relatively high position between one and two blocks. By mid-July, the volume of transactions in Beihai had risen sharply again, and the main buyers had become Mercuria and Chevron. The spot procurement atmosphere is relatively strong and sustained.

This can be corresponded by tracking the reduction in the hyper-seasonality of global shipments, mainly tracking two main shipping regions, one for OPEC and one for Russia.

Judging from the monthly data, OPEC's shipments in June decreased by about 1 million barrels per day month-on-month, and in the first half of July, the order of magnitude was the same as that in June, but from the perspective of subsequent shipment plans, July continued to decrease by about 600,000 barrels per day compared with June. This year, OPEC's overall shipment situation is a hyper-seasonal reduction.

There are two main reasons, first of all, the Middle East ended this year's spring inspection in June, and the commissioning of new refineries in the Middle East in the past two years is relatively large, so the refinery's feed demand has increased, reducing the ability to export to foreign countries. Secondly, this year is also extremely high, and Saudi Arabia's seasonal domestic demand, that is, power generation demand, has expanded, reducing the magnitude of exports.

Russia's shipments fell by 170,000 b/d in June from the previous month and 700,000 b/d in mid-July. Combined with the subsequent shipment plan, it is expected that the overall shipment volume in July should be about 300,000 b/d lower than the previous month, slightly more than the same period last year.

The reason for the reduction in Russia's exports, the continuation of the Russian-Ukrainian war will lead to the loss of refining capacity in some refineries in Russia, and furthermore, Russia has announced that it will implement compensation production reductions under the OPEC framework before this summer or autumn.

Summer is also the peak season for domestic demand in Russia, not only the export volume of crude oil has decreased, but the export volume of oil products has not increased, resulting in a decline in the total export volume of oil products and products.

The decline in shipments in this part also corresponds to the strong spot procurement, corresponding to the destocking of the peak season, and there is no big problem with the spot inventory.

[4. WTI forced position]

The fundamentals have the conditions to force positions, including the overall inventory level in Cushing is not high, and there is an expectation of destocking in September, which may fall to about 25 million barrels. And the supply of DWS for Cushing's deliverable oil is tight.

Recently, DWS's spread against WTI has continued to strengthen, and it has now exceeded 1 yuan 5. Compared with the forced position market of WTI at the end of September last year, the premium level is relatively close, providing certain conditions for forced positions.

On the other hand, CSO options are also a catalyst for WTI bullishness. The CSO options of WTI 08 expired on July 19, and before the 19th, the exercise price of the options was concentrated in the 82~84 range of WTI, so when approaching this range, the buyer would close the position at the futures end to hedge, which formed an increase effect, further amplifying the volatility of the near end, which in turn exacerbated the degree of WTI forced positions.

Therefore, a few days before the expiration date on the 19th, the WTI forced position market was very obvious.

[5. Looking forward to the market outlook]

We believe that in the process of macro sentiment stabilizing and repairing, the fundamentals of oil are still relatively good. The performance of the peak season is neutral and strong, and there should be a repair rebound. Because the destocking is carried out, the spot is also very strong. The cracking of the oil has stabilized and will not be used as a negative feedback to the oil for the time being.

In terms of end-use demand for oil products, the EIA has generally been seasonal.

Due to the obvious weakening of the macro, there is no way to resonate with the fundamentals this year. Judging by the valuation of the high, it may move to a lower position than the high before the start of the peak season. Brent's peak season high may be in the range of 85~88.