2022 Penetrating Appearance Series (I) Can the UAE shout the collapse of oil prices in one sentence?

【Introduction】Since 2020, the international energy market has been turbulent, and a barrel of black crude oil carries the intertwined logical relationships of international geopolitical relations, economic operating costs, global economic and trade relations, commodity cost pricing, etc., so the research and judgment of international oil prices should be based on the values of "not afraid of floating clouds to cover the eyes, chaotic clouds flying across the sky is still calm", dare to penetrate the appearance to observe the essence.

The UAE's one-sentence oil prices flash crashed

Since the rise of international tensions on February 24, the core contradiction between sanctions and counter-sanctions has focused on the outbreak of energy markets, resulting in strong resonance in global energy markets and the rapid widening of basis (spot-futures) levels, concerns about supply have made Brent spot premium futures once exceed $10 / barrel, and after the United States issued a ban on energy imports to Russia, Brent futures prices also soared to near $130 / barrel, an increase of 38% from the average price of $94 / barrel in February. However, on March 9, the futures price quickly collapsed, falling from nearly $130/ barrel to $112 / barrel, a decline of as much as $18 / barrel, setting a record for the largest one-day decline in crude oil since the subprime mortgage crisis in 2008.

The UAE's ambassador to Washington said in a statement sent to British and American media on Wednesday that the UAE is in favor of increasing oil production and will encourage OPEC to consider increasing production more quickly. The market believes that this news has accelerated the decline in international oil prices and expanded the gains in US stocks. Does a single sentence in the UAE have such power? Probably the opposite is true.

The dominant logic of the operation of the international energy market

"Grasping the main contradiction" is an important magic weapon for studying the law of price operation. Since February 24, the core driver of the rapid rise in international oil prices has been the supply of more than 7 million barrels of oil (including refined products) in Russia under the SWIFT basket of sanctions, and there is no alternative source for this energy gap in the short term.

The process of oil prices soaring from 90 all the way to 130 mainly experienced three key points:

On February 26, Europe and the United States announced that they had reached an agreement on the implementation of SWIFT sanctions against Russia, and on February 28, the US Treasury Department issued corresponding sanctions measures and sanctions lists. SWIFT sanctions as a "financial nuclear bomb" of the destructive power is not out of thin air, European and American companies began to take the initiative to avoid risks, the energy market led to Russian crude oil for a time no one, Ural premium Brent once exceeded 30 US dollars / barrel, supply and demand mismatch has been formed. The collision between sanctions and counter-sanctions outside the energy market has also escalated

On March 5, a nuclear power plant in Ukraine was affected in the conflict, and the market's concerns about the international situation further heated up, while the impact of the spread of SWIFT sanctions that had been fermented for four days was further expanded, and oil prices once again tested new heights.

On March 8, the United States escalated sanctions again and unilaterally imposed a ban on Russian energy imports. The ban directly led European companies that still have a "fluke" mentality to exempt companies from THE SWIFT sanctions for energy to abandon their intentions to import energy from Russia. On the same day, Russia also announced the "Special Foreign Economic Decree" to control the export of key resources.

Therefore, the main logic of the rise in oil prices is based on the main logic of supply and demand mismatch of 4 million barrels of crude oil demand growth and 4 million barrels of supply reduction in 2022, and quantitative pricing is based on the impact of SWIFT sanctions. However, a sentence on the UAE's view of production quotas, which has a general say in OPEC+ organizations, can change the main logic of oil price increases, and it needs to be analyzed in detail.

OPEC+ production increase has some confidence

First, let's analyze the willingness of OPEC+ to increase production. In the "International Oil Price Model", the author has introduced the oil price model of the three places in detail and will not repeat it. There is no doubt that OPEC+ has been the dominant oil price pricing since 2020, after the price war between Saudi Arabia and Russia in 2020 led to negative oil prices, OPEC+ internal differences have almost bridged, although the Saudi Arabia and Russia, which dominate the OPEC+ organization, have different demands on the energy market, but for OPEC+ members whose GDP is heavily dependent on energy exports, high oil prices are more in line with the "true fragrance law". Therefore, since OPEC+ reached an epic production cut agreement, it has been based on the goal of maintaining the balance between supply and demand of crude oil to formulate production cut plans, and this law has not been broken to this day: OPEC+ will not actively seek to increase the supply of crude oil to oversupply in a way to suppress oil prices.

Secondly, looking at the production increase capacity of OPEC+, since the gradual launch of the production increase plan under the framework of the production reduction agreement, the compliance rate of OPEC+ production reduction has exceeded 110% for many consecutive months. Reduction performance rate = 100% ( actual output - quota) / quota, that is, if the actual output is greater than the quota, the performance rate of the reduction < 100%, and the performance rate of the reduction exceeds > 100%, means that the actual output is less than the quota, and OPEC+ since October 2021 has been more than 100% and rising, as of The latest statistics on March 9, the implementation rate of production reduction has exceeded 120%, which means that OPEC+ is now unable to achieve a production increase plan of 400,000 barrels per day. However, it should be noted that there are three countries that are outside the production cut framework: Iran, Libya, and Venezuela, and OPEC+ increased production by about 560,000 bpd in February. That is to say, only 80% of the quota has been completed within the production reduction framework, while the production increase outside the production reduction framework has been exceeded. Therefore, in the short term, OPEC+ does not further increase production capacity.

Let's look at the surplus capacity of OPEC+, that is, the potential unproduced capacity. For the loose concept of surplus capacity, each institution has its own methodology, so it causes a large data bias. Some institutions believe that the surplus capacity is to subtract the country's peak production capacity from its current output, so that the OPEC+ remaining capacity of 4 million bpd is no different from the sword. The OPEC+ internal is based on the next three months of production capacity for statistics, and does not include special cases of production capacity, according to the understanding of OPEC+, the current remaining capacity is about 1.7 million barrels, Saudi Arabia 1 million barrels, the United Arab Emirates 700,000 barrels. The difference of 4 million barrels and 1.7 million barrels is probably calculated that Iran can increase production by 1.5 million barrels in the short term and Venezuela can increase production by 800,000 barrels in the short term. It is obvious that the Iranian nuclear agreement has not been reached, Iran's 1.5 million barrels of remaining production capacity is still floating in the sky, and Venezuela may have further production increases in the near future, all depending on the "sanctions policy" of the United States. What is even more surprising is that Saudi Energy Minister Salaman Jr. stressed that Saudi Arabia has no way to maintain its potential 1 million barrels per day of production (which may be that traditional oil fields have decayed and require longer enrichment time), and that production will decline rapidly after start-up, and that Saudi Arabia will be able to truly achieve a capacity increase of 1 million barrels per day by 2027.

So in summary, OPEC+ now has neither the will, the ability, nor the courage to increase the output of OPEC+, so when Biden signed the ban on Russian energy imports, he sought Saudi Arabia's support for OPEC+ to increase production, and the UAE's shouts only helped to regain some face.

The essence of the oil price flash collapse has surfaced

The author believes that the main logic of oil price increases has not changed, and even has a gradual fermentation trend, so the trend of oil prices in 2022 has not changed, and the short-term oil price collapse is caused by the lack of liquidity in the futures market. Since December 2021, under the pressure of structural inflation, the commodity market has continued to heat up, and after the international tensions have heated up, commodity futures have shown a wide range of "short-rolling" states, energy (crude oil, natural gas, gasoline, diesel, coal, fuel oil, etc.), non-ferrous metals, corn, soybeans, wheat are almost one-sided, this unilateral short-rolling even threatens the basic contract disk, that is, the basic disk of the supply side.

Since the author does not have a "Depth of Market" trading software, it is impossible to display some data on a finer granularity, but it can be deduced from the panic index of crude oil (OVX) to deduce the situation of the long-short imbalance (the higher the OVX means the higher the imbalance of the long-short ratio).

One-sided long net positions have led to a short base session on the supply side, causing margin pressures for these producers to soar. Even Wall Street believes that the pressure on futures shorts to make up the margin superimposed on the expected pressure of the Fed to raise interest rates has had a serious impact on financial market liquidity, which is directly reflected in the rapid surge in interest rates in the primary market (FRA-OIS This interest rate differential reflects the financing rate of the primary market, and the higher the value means the tighter the liquidity):

Liquidity contraction from the perspective of the crude oil futures market may be manifested as two kinds of long profits or long turns short, the former is easy to understand, but what is the basis for long turns short? Perhaps the answer comes from the U.S. pledge to release 30 million barrels of SPR, and in 2021, when the U.S. claimed to release 40 million barrels of crude oil SPR, it also reversed the trend of unilateral bulls:

It is certain that the release of SPR, although immediate, is limited to the soup to stop boiling, and will not change the main logic of the operation of the crude oil market, and SPR can not withstand such a three-fold toss, it is the lowest level in nearly 20 years, which is very dangerous for this special product of crude oil:

From the perspective of the domestic market, for some inertia reasons, it has always lagged behind the pricing of international oil prices, and the risk control of domestic futures market transactions is more stringent, which has led to the domestic crude oil futures in a few days in succession there are two up and one down situation.

Aftermarket outlook

China's economy is running smoothly, the demand side is basically stable, in the short term, the fundamentals are indeed appearing "flour is more expensive than bread" situation, the market needs time to digest, but if in the long run, the inflation trading logic (see "Commodity Market Trading Logic" for details) will continue for a long time in the cycle of dollar interest rate hikes and balance sheet reductions, and the commodity heat will not retreat because of short-term disturbances. In the context of escalating international tensions, instead of waiting for the "bread is more expensive than flour" window to appear, it is better to accept the short-term new normal of "flour is more expensive than bread" according to their own situation and ensure the bottom line thinking of "production and operation".