Tight supply overwhelms recession fears, and international oil prices are back on the rise, wary of short-term rebounds

The Surging News reporter Yang Yang

International oil prices have resumed gains after two consecutive days of declines as signs of tight supply in the market once again overshadowed recession fears.

As of Friday's close, WTI crude oil futures for August delivery on the New York Mercantile Futures Exchange were quoted at $104.79/b, and brent's crude oil futures contract for September delivery on intercontinental exchange in London closed at $107.02/b, both up more than 2% intraday. Amid concerns about a potential recession in the U.S. economy, international oil prices plunged earlier this week, with Brent and WTI crude oil, the two major benchmarks for global crude oil pricing, falling by more than 10% in a single day on July 5, and once falling below the important mark of $100 / barrel.

But on the other hand, the supply shortage in the short term is still difficult to solve, and OPEC+ has more than enough to increase production. Some oil-producing countries suffered from force majeure, political turmoil in Ecuador and Libya led to reduced production, and workers' strikes in Norway during the week also supported short-term oil prices. A Russian local court recently ordered a 30-day suspension of the Caspian Pipeline Union (CPC), the "lifeblood" of Kazakhstan's oil exports, after appealing to the court, resurfacing concerns about tight supply.

Brent oil prices have been trending in the past 3 months

The seesaw between the decline in demand and tight supply led to a range of oil prices fluctuating in more than $15 this week, the largest volatility since March, according to The Paper' estimates. Although crude oil futures have fallen by nearly 4% this week, international oil prices have risen by 40% this year, up more than 20% compared to the eve of the Outbreak of the Russian-Ukrainian conflict.

Rarely, Wall Street's outlook for oil prices is in stark contrast. Citibank analysts pointed out in the latest report that if the economy falls into a recession that hits demand hard, oil prices could fall to $65 by the end of the year and $45/b by the end of 2023. Goldman Sachs and JPMorgan Chase continue to sing long oil prices. Goldman Sachs believes that the collapse in oil prices due to recession fears is somewhat excessive. While the sharp decline was driven by fears of a global recession and a technical sell-off, market fundamentals have barely changed. Just days before the oil price slumped, JPMorgan shouted the idea that international oil prices could rise to $380 a barrel in extreme cases. JPMorgan analysts believe that if U.S. and European sanctions prompt Russia to implement retaliatory production cuts, global oil prices could reach $380 a barrel.

Combined with the views of major market institutions and investment institutions, the views of $65 and $380 are too extreme.

Meanwhile, the latest U.S. crude oil inventory report has mixed sentiments for investors. According to data updated by the U.S. Energy Information Administration (EIA) on July 7, gasoline inventories in the U.S. for the week to July 1 were -2.497 million barrels, expected -480,000 barrels, compared with 2.645 million barrels in the previous value; refinery equipment utilization rate was 94.5%, expected 95.1%, and the previous value was 95%; EIA crude oil inventories unexpectedly surged by 8.235 million barrels, a decrease of 1.043 million barrels, while Strategic Petroleum Reserve inventories recorded their lowest since the week of December 6, 1985.

"The oil price rally actually began on July 7, as $100 Brent crude was an irresistible temptation for Asian physical buyers." Jeffrey Halley, senior market analyst at OANDA, said in an analysis report on July 8 that the decline in U.S. gasoline inventories highlighted that supply remained tight, especially in refined products, contributing to the recovery in oil prices.

The global oil market is still in a tug-of-war between demand and supply.

Against the backdrop of the worst high inflation in 40 years, the Fed hinted at tighter monetary policy. Driven by this, the dollar index recently hit a 20-year high, further increasing the cost of purchasing goods denominated in dollars, resulting in pressure on oil prices. Soaring inflationary pressures have prompted the Fed to accelerate the monetary policy tightening process, which in turn has spurred expectations of a possible future recession that would hit oil demand.

After the oil price oversold, the tight supply side and the existence of great uncertainty have not changed. UBS economists expect oil prices to rebound as a lack of supply relative to demand is once again apparent. Oil prices are expected to rise in the coming months as supply growth lags behind demand growth.

Joseph McMonigle, secretary general of the International Energy Forum, said in an interview on Thursday that high oil prices will continue unless the Russian-Ukrainian conflict ends or the global economy falls into recession because non-OPEC producers are unlikely to increase supply. He was skeptical that non-OPEC countries would be able to increase supply as expected.

Guojin Securities Research Report believes that considering that Saudi Arabia raised the official price of crude oil in August by 2.8-3.5 US dollars / barrel on July 5, showing the confidence of major oil-producing countries in the tight physical supply and demand of crude oil during the peak season of summer demand, oil prices have plummeted since then, and the current crude oil market has entered the fundamentals is still in the game of seasonal peak season and expected serious recession. From the global overall point of view, the travel intensity of most overseas economies continues to maintain a high level to promote oil consumption to maintain a strong, with the final consumption of oil products into the peak season, the supply and demand of various types of oil products continue to maintain a tight balance Of the general trend has not changed.

Jianxin Futures believes that the current structure of the current period in the process of this round of oil price decline is relatively strong, and the recent monthly rise has remained high, so this round of killing is more caused by macro and capital factors, and the crude oil spot market is still tight. On the supply side, Biden will meet with Saudi Arabia's top brass, and given that oil prices have fallen significantly recently, and Saudi Arabia needs to balance the common interests of OPEC oil producers and Russia, it is expected that the decision to increase production will be more cautious. The demand side EIA shows that the US gasoline and diesel inventory recorded a decline for the first time after several weeks of continuous rise, the recent road traffic flow in the United States is basically stable, Eurasia has rebounded, and there is still a certain resilience in crude oil demand in the third quarter. In the context of tight global refining capacity, refining profits will also be repaired. Oil prices are still supported by low oil inventories and peak demand seasons, waiting for the release of market sentiment in the short term.

CITIC Futures analyzed in the report that in the short term, the price of 100 yuan still has strong support for oil prices. From a technical point of view, it is an important integer mark and a previous intensive support level. From a supply and demand perspective, OECD commercial inventories are now basically flat with last December, while oil prices rose from 80 to $120/b. From the perspective of the relationship between inventories and oil prices, the current median valuation support is about $100, and the low support is at $80. If oil inventories continue to accumulate, valuation support moves downwards accordingly. In the medium term, there is currently a high geopolitical risk premium implied in crude oil prices.

Editor-in-Charge: Li Yuequn

Proofreader: Zhang Liangliang