Outburst! Syria under air strikes! Crude oil is coming? White House: The decision to cut production is not wise! Intention to rebuild the Strategic Petroleum Reserve

Let's take a look at what's important!

Airstrikes hit and around Damascus, the capital of Syria

According to the Syrian News Agency, on April 4, local time, the Syrian capital Damascus and its surrounding areas were hit by air strikes, and Syrian air defense systems were intercepting hostile missiles.

According to Syrian military sources, at 0:15 a.m. local time on April 4, the Syrian capital Damascus and its southern areas were hit by Israeli air strikes. Syrian air defenses quickly activated and intercepted most of the hostile missiles, but the airstrikes still resulted in the death of two civilians and some material damage.

Comprehensive "Tehran Times" and local media reports, on April 3, local time, Iran's first vice president Mohammad Mohber confirmed that Iranian President Saeed Ibrahim Raisi has accepted the invitation of Saudi King Salman bin Abdul-Aziz to visit Saudi Arabia.

Crude oil is coming?

Major OPEC members such as Saudi Arabia, the United Arab Emirates and Iraq suddenly and unexpectedly announced further production cuts of 1.16 million b/d, effective from May and lasting until the end of 2023. Coupled with Russia's 500,000 b/d production cuts by the end of the year, it means that OPEC+ will cut an additional 1.66 million b/d this year on top of the 2 million b/d already cut, and international oil prices jumped 8%, the largest increase in nearly a year.

The S&P 500 closed up 15.20 points, or 0.37%, at 4,124.51. The Dow closed up 327 points, or 0.98%, at 33,601.15. The Nasdaq closed down 32.45 points, or 0.27%, at 12,189.45. The Nasdaq 100 closed down 0.25 percent, the Russell 2000 small-cap index edged lower and the "fear index" VIX closed down 0.86 percent at 18.54.

Most of the 11 S&P sectors closed higher, as OPEC stepped up production cuts to push the energy sector up its biggest one-day gain in five months and rose nearly 5 percent. But the technology sector fell 0.05 percent, including Tesla's optional consumer sector, as well as the real estate sector, both down nearly 1 percent.

Last week's weekly report from the U.S. Commodity Futures Trading Commission (CFTC) showed that the number of contracts short U.S. WTI crude fell sharply, the biggest drop in nearly seven years since 2016, meaning many traders who had previously bet that oil prices would fall were unwinding their positions.

John Kemp, senior market analyst in the energy industry, recently pointed out that investors in the oil market began to cover short positions before OPEC+ announced production cuts last Sunday to shock the market. He believes that "the size of the production cuts and the surprise factors may be aimed at strengthening the short covering boom, boosting confidence, and attracting more bullish investors back to the market." ”

CFTC and ICE futures data disclosed before OPEC+ announced the cuts show that hedge funds and other fund managers bought about 61 million barrels of six of the most important oil futures and options contracts in the European and American markets in the seven days to March 28 (last week).

This already reflects a big shift in hedge fund investing. In the two weeks before, fund managers had sold a combined 28.1 million barrels, the fastest sell-off in nearly six years.

Most of last week's buying came mainly from the previously bearish closing of short positions, which were about 48 million barrels, rather than the new long position of 13 million barrels.

Last week's buying focused on NYMEX and ICE WTI (49 million barrels), US gasoline (14 million barrels), US diesel (5 million barrels) and European diesel (1 million barrels), in addition to a net sell-off of 9 million barrels of Brent.

White House: OPEC's decision to cut production is unwise, and the United States intends to rebuild the Strategic Petroleum Reserve

The White House said that given the uncertainty in the market, we believe that OPEC's decision to cut production is unwise; The United States will continue to work with oil producers and consumers to ensure supply growth and lower prices for consumers; For OPEC+'s production reduction plan, the United States has been informed in advance and will respond cautiously; The United States intends to rebuild the Strategic Petroleum Reserve.

US Treasury Secretary Janet Yellen: OPEC+ production cuts are not good for the global economy

U.S. Treasury Secretary Janet Yellen reiterated that in the event of a proliferation of bank runs, the Treasury Department will intervene at any time.

Yellen said the current situation in the banking sector is stabilizing. The Treasury Department will not allow a resurgence of contagious bank runs. The impact of OPEC+ production cuts is unclear. But such action will not help global growth and may contribute to uncertainty. Therefore, OPEC+ crude oil production cuts are very unconstructive moves. For the time being, there is no need to reconsider the export price ceiling measures for Russian crude oil.

Fed hawks: OPEC+ production cuts make it more challenging for the Fed to reduce inflation

Saint Louis Fed President Bullard said Monday that OPEC+'s decision to cut production was unexpected and that higher oil prices could make the Fed's work to reduce inflation more challenging.

Speaking to the media, Bullard said, "It's an accident, and whether it will have a lasting impact is a question." Oil prices continue to fluctuate and are difficult to track accurately. Oil prices can fuel inflation and make our jobs more difficult."

Bullard also said that even without production cuts, higher oil prices this year are in line with his economic expectations because he believes the demand for energy will increase. "China's economy recovered faster than expected in the first half of 2023, Europe is avoiding recession, and strong US economic data are all positive factors for the oil market, so I expected some increase in oil prices."

Bullard reiterated his recent view that interest rate tools are used to fight inflation, not to solve bank pressure. He noted that Wall Street's bet on banking is too likely. The Fed has adopted a two-pronged approach of using macroprudential tools to address banking sector problems, while continuing to deploy monetary policy tools to reduce inflation.

The Fed raised interest rates by 25 basis points as scheduled at its March meeting, raising the benchmark federal funds rate to a target range of 4.75%-5%, the highest level since September 2007, on the eve of the financial crisis. The resolution statement deleted "continued rate hikes are appropriate" and replaced it with "some additional policy tightening may be appropriate", which was interpreted as dovish rhetoric. The "dot plot" still maintains the interest rate expectation at 5.1% at the end of this year, or only one more modest rate hike.

In his speech in late March, Bullard said he raised his forecast for peak interest rates this year, from 5.375 percent to 5.625 percent, given the continued strength of the U.S. economy. The forecast is based on the assumption that pressure on the banking sector will ease.

The ISM manufacturing sector in the United States contracted for five consecutive months in March

On Monday, data released by ISM showed that the ISM manufacturing index in the United States unexpectedly fell to 46.3 in March, the lowest since May 2020. Excluding the coronavirus pandemic, the ISM manufacturing index in the United States hit its lowest level since 2009 in March. Among them, the employment sub-index hit a new low since July 2020, and the new orders index also fell into contraction.

The US ISM manufacturing index for March was 46.3 vs 47.5 expected and 47.7 previously. 50 is the dividing line between glory and drought. This is the fifth consecutive month that the manufacturing PMI has contracted.

It should be noted that this is the second consecutive month, and all sub-indices of ISM have contracted. The latest ISM data suggest that rising interest rates, heightened recession fears and tighter lending conditions could begin to weigh on business investment. And as U.S. households continue to shift more discretionary spending to services, this exacerbates the already demanding challenges facing manufacturing.

ISM's data was less consistent with S&P global data released earlier in the same day, although both pointed to US manufacturing still in contraction territory in March. According to S&P Global, the final Markit manufacturing PMI in the United States in March was 49.2 and the preliminary value was 49.3, the highest final value since October 2022. Among them, the final value of the new orders sub-index rose to 48.6, the highest final value since September 2022, and the final value of the output sub-index reached a new high since October 2022.

After the release of the manufacturing PMI data, the US 10-year Treasury yield plunged nearly 6 basis points short-term, refreshing the daily low and approaching 3.42%, and the overall decline in the day turned more than 4.3 basis points. The two-year U.S. Treasury yield plunged nearly 10 basis points short-term, updating a daily low and approaching 3.98%, and fell more than 4.1 basis points during the day.

ECB Governing Council Holzman: A 50 basis point rate hike in May is still possible

ECB Governing Council member Holzman said it was "still possible" to raise interest rates by another 50 basis points if the turmoil that hit the global banking system did not worsen. He acknowledged that the series of events triggered by the collapse of Silicon Valley banks could have the effect of raising interest rates by curbing credit, but said he felt that the rate hikes would still have to be maintained. If things don't get worse in May, Europe can afford another 50 basis point rate hikes, especially if there are no signs of moderating inflation, and central banks will have to do more to curb inflation. His comments were among the most concrete about what the ECB might do next, and most of his colleagues are wary of making predictions amid such high levels of uncertainty.

OPEC+ "amplification move" ignites market sentiment

On the evening of April 2, Saudi Arabia and other seven OPEC+ oil producers suddenly announced voluntary additional production cuts, and Russia also said that it would voluntarily extend the previous additional production cuts to the end of this year, and the voluntary additional production cuts of oil producers have reached 1.649 million barrels per day.

The Futures Daily reporter observed that OPEC+ collectively announced voluntary production cuts to ignite market sentiment, and domestic and foreign oil prices jumped collectively at the opening of April 3. Among them, WTI crude oil futures opened sharply higher by 6.4%, and then extended their intraday gains to 7%. NYMEX's most active WTI crude oil main futures contract traded 10,134 lots in one minute, with a total value of $767 million. Meanwhile, Brent crude futures rose more than $6 to $86.44 a barrel. The main contract of SC rose by more than 8%, the main contract of fuel oil rose by more than 6%, the main contract of low-sulfur fuel oil rose by nearly 6%, and the main contract of asphalt rose by nearly 5%.

To the market's surprise, Saudi Arabia and other OPEC+ producers announced voluntary production cuts on April 2, with Saudi Arabia saying it would cut production by 500,000 barrels per day from May until the end of 2023. Meanwhile, the UAE, Kuwait, Iraq, Oman and Algeria said they would voluntarily cut production during the same period. Combined with Russia's previous voluntary production cuts of 500,000 b/d, the total reduction is 1.649 million b/d, accounting for about 1.5% of global oil production.

"This OPEC+ production cut is beyond market expectations." Liu Shunchang, an analyst at South China Futures Energy, said that for one thing, representatives from OPEC and its allies said privately on Friday that they had no intention of changing production limits. Second, none of the 14 traders and analysts surveyed last week expect change. Third, Saudi Arabia's energy minister said last month that the current OPEC+ production target "will remain unchanged for the rest of the year." Fourth, this week's OPEC+ meeting is approaching, and OPEC+ announces production cuts in advance before the meeting, which is rare.

The action by producers was announced the day before the OPEC+ oversight committee meeting, an unprecedented way for the group to decide on policy. According to reports, as recently as March 31, delegates also privately said that they had no intention of changing their production limits. This unexpected decision surprised the oil market.

Regarding the original intention of the intensive statement of production reduction by oil producers, Saudi officials have responded. Saudi Arabia's energy ministry said the voluntary additional production cuts were intended to support precautionary measures in the crude oil market. In other words, oil producers believe that the current crude oil market still has potential downside risks, and implement support measures for oil prices in advance to prevent a sharp decline similar to that in mid-March.

"The OPEC+ cut is about 1.6 million b/d on top of the original 2 million b/d cut. This equates to a total reduction of 3.6 million b/d, a reduction second only to the 2020 Great Cut of the Century, when OPEC+ cut a combined 9.7 million b/d, ensuring a continued recovery in oil prices from historic lows. Yang An, head of Haitong Futures Energy, said.

Looking back at OPEC's oil policy over the past 40 years, its influence has gone through five stages.

According to Du Bingqin, a senior analyst at Everbright Futures, in the first stage, OPEC was established, which had limited impact on oil prices due to its relative weakness; In the second stage, OPEC caused oil shortages by imposing an "oil embargo" on the West, releasing a large amount of cheap oil to force high-cost oil producers to reduce production, etc., triggering two oil crises, and having direct pricing power and absolute influence on global oil prices; In the third stage, OPEC cooperates with Western countries to promote the growth of global oil demand with low oil prices; In the fourth stage, in order to cope with competition from the United States and Russia, OPEC gave up production restrictions and price protection, trying to regain market share by crowding out high-cost oil producers; In the fifth stage, a new round of production reduction agreements was reached, oil prices entered the era of rebalancing, and OPEC countries began to work hand in hand with non-OPEC countries.

The picture shows the comparison of oil prices and OPEC production since the 90s of the 20th century (unit: US dollars / barrel, 10,000 barrels / day)

In her view, in recent years, OPEC's influence on international oil prices has been gradually weakening, but it is still the main source of global oil supply, and its production increase or decrease still has a non-negligible role in the trend of oil prices. "Against the backdrop of a slow recovery of U.S. shale oil and sanctions on Russian crude, OPEC's control over oil prices is gradually restored."

"The change in the production reduction benchmark in April 2023 has a greater impact than the production reduction agreement in October 2022." Zhang Zhengze, an analyst at Guohai Liangshi Futures, said that the production reduction agreement in October last year decided to reduce the production quota by 2 million barrels per day on the benchmark in August 2022, because the previous OPEC+ production continued to not meet the established production quota, and the actual output of some countries was lower than the new established production in November, and there was no need to make a production cut, the actual production reduction was less than the quota adjustment, and the actual production reduction scale was around 1.1 million barrels per day. The production reduction agreement in April this year decided to be implemented on the actual production benchmark in February this year, and most of the current output of major member countries is higher than the target output, with room for production reduction and high implementation efficiency.

In Yang An's view, the difference between this production cut and the previous one is that OPEC takes the initiative to manage expectations. "The decision to defuse potential risks in advance without a signal of serious oversupply in the crude oil market resolves the excess pressure that the market is worried about, and will further aggravate the tight supply expectations of the global crude oil market and raise investors' expectations for oil prices." Yang An said that OPEC members' production cuts are obviously a coordinated action based on Russia's previous initiative to cut production by 500,000 barrels per day, which also means that the cooperative relationship between the OPEC+ alliance has been further consolidated under the impetus of common interests, of course, such a decision also means that Saudi Arabia and other oil-exporting countries have closer relations with Russia, and at the same time, the conflict between European and American crude oil consumers such as the United States and other European and American crude oil plagued by high inflation has further intensified.

Considering that Europe, the United States and Western countries are struggling to fight inflation and prevent the spread of the banking crisis, it is difficult to tolerate the pressure of another surge in oil prices. "This OPEC countries take the initiative to reduce production more, will further tighten the already basically tight oil market, oil prices upward pressure is greater, the United States is likely to cooperate with the OECD again to respond and countermeasures, the crude oil market with the supply and demand game will again usher in a stage of sharp fluctuations." Yang An said.

The focus of the short-term game is still on the supply side

"After announcing the production cut, the second quarter balance sheet of the three major institutions basically turned from the previous accumulation to a large destocking, considering the seasonal strengthening of gasoline demand in the context of low inventories, oil prices will oscillate strongly in the second quarter, but crude oil belongs to the post-cyclical varieties of the economy." Zhang Zhengze said that the direction of weakening demand in the future cannot be reversed, and after entering the early stage of the interest rate cut cycle, we will see gasoline demand weaken, and it is difficult for oil prices to form a trend upward market, or treat it as an oscillation.

Although OPEC, represented by Saudi Arabia, claims that voluntary production cuts are a preventive measure aimed at supporting the stability of the oil market. But OPEC's production cuts are undoubtedly aimed at keeping oil prices above $80 a barrel, and Goldman Sachs has moved its oil price center of gravity up by $5 per barrel, and more optimistic institutions believe that this move will move the center of gravity of oil prices up $10 per barrel. "If the cuts are fully materialized, it could push the Brent benchmark oil price to $100 a barrel earlier than previously expected, and in extreme cases around $110/barrel." Of course, this is a more optimistic assessment. Yang An said.

In Du Bingqin's view, OPEC's unexpected production cut may bring a new inflation shock to the global economy, for which the Fed will face further anti-inflation pressure, and also affect the market's expectations for the pace of the Fed's interest rate hike, and the possibility of stopping interest rate hikes in May is expected to decrease again.

At present, we have not seen countermeasures with the United States. "Considering the huge impact of macro factors on financial markets this year, it is expected that oil prices will not have such a strong performance. The short-term rebound of oil prices of about $5 is a more reasonable assessment, and whether oil prices continue to rise or peak and fall in the later period depends on the subsequent game process of interest groups on both supply and demand sides. Yang An said.

As far as the crude oil market is concerned, the game in the first quarter is concentrated on the demand side, and this concentrated production reduction will also mean that the market game in the second quarter will shift to the supply side.

"The focus of the short-term market game is still on the supply side, especially after OPEC+ has exceeded expectations to cut production." Liu Shunchang said that after the market fully priced in this supply-side event this week, it is expected that the market focus will return to the demand side, which is likely to be similar to the situation after OPEC+ exceeded expectations last year.

In his view, the current global macro situation is more severe than last year, after the Silicon Valley bank incident, the market is aware of the major risks facing the economy and finance in the United States and Europe, recession is not a small probability event, the market will gradually price the recession, crude oil demand pressure continues to increase. "After the supply side exceeds expectations, oil prices will be pushed up in the short term, but after the market is fully priced, the market transaction logic will return to the demand side." Liu Shunchang said.

In this regard, Zhang Zhengze also believes that the demand side in the second quarter limits the space below the operation of oil prices, and the supply side determines the strength of the marginal upward rebound. "In the process of breaking the decline in the crude oil market in the early stage, the gasoline cracking spread continued to strengthen, indicating that the US gasoline demand is strong at this stage. The strength of gasoline is not only due to the fact that the demand side has gradually entered the summer gasoline demand season after the end of the new crown and influenza in the United States, but also the reason for the tight global refining on the supply side and the increase in US gasoline exports to South America. Zhang Zhengze said that on the whole, gasoline demand, which is more on the service consumption side, is still resilient in the first half of the year, and in the next 1 to 2 months, due to the speculation space in gasoline demand under the background of low inventory, the space below oil prices is limited. The OPEC+ production cuts have tightened the supply side of crude oil under low elasticity, which will intensify the rebound of oil prices from below.

In Liu Shunchang's view, under the pressure of recession in the United States and Europe, oil prices will probably continue to shift down after a sharp surge in the short term.

It is worth mentioning that although following the sharp rebound, the chemical market generally fell after opening high yesterday due to the loss effect of cost transmission, indicating that this news has little impact on chemicals, and it is not appropriate to rashly deduce the rise of chemicals according to changes in crude oil prices. In addition, whether the oil price itself can rise further is still facing many uncertainties, and the trend of chemicals depends on the impact of the supply and demand of the chemicals themselves.

"Short-term international oil prices will still be in the game between macro and supply and demand." Du Bingqin said that under the current high volatility, energy varieties such as fuel oil and asphalt will also show sharp fluctuations in oil prices, and it is necessary to be vigilant against the risk that terminal demand recovery in the second quarter will not be as expected.

This article is from Futures Daily