Caixin on September 11 (Editor Xiaoxiang) The international oil price collapsed, and it collapsed quite thoroughly...

On Tuesday, as the global benchmark Brent crude oil fell below $70, the oil price reached its lowest level since December 2021. Compared to the high point in April this year, the cumulative drop in Brent crude oil has exceeded 22%, officially entering a technical bear market.

In fact, what is more alarming than the sharp drop in prices is perhaps the popularity of the crude oil market that is currently making market participants 'dismayed'.

Well-known financial blog website Zerohedge stated on X platform on Tuesday that commodity prices are currently setting the most difficult economic hard landing pricing since the turn of the century: the popularity of the oil market is even worse than during the peak of the global financial crisis, the European sovereign debt crisis, and the global COVID-19 lockdown period.

From the position data, this stunning warning is clearly not an exaggeration. As shown in the figure below, net long positions of crude oil held by hedge funds are currently falling to historic lows.

As energy expert John Kemp has calculated, in the seven days to September 3rd, hedge funds and other fund managers sold the equivalent of 0.117 billion barrels of six of the most important crude oil and oil product futures and options contracts.

Note: The red line in the graph represents net position data.

The overall open interest has dropped to only 93 million barrels, the lowest level in at least ten years. Fund managers have almost universally sold off, with hold position changes including NYMEX and ICE's WTI crude oil (-66 million barrels), Brent crude (-38 million barrels), European diesel (-9 million barrels), US diesel (-3 million barrels), and US gasoline (-1 million barrels).

Negative sentiment towards crude oil has quickly spread to refined fuels, with strong put sentiment towards gasoline, especially diesel and other middle distillate oils.

Given that even after OPEC+ announced the postponement of the two-month implementation of the production increase plan, Brent oil prices still fell by about 10% last week, the current pessimism in the oil market is clearly evident. As a recent sign of weak demand, Saudi Arabia has also lowered the pricing for its flagship crude grades aimed at major Asian markets.

From a supply and demand perspective, the potential slowdown in the global economy, including the United States, is no longer new news. Many oil industry executives at the APPEC conference held in Singapore on Monday stated that due to the accelerating transition to electric vehicles and clean energy, China's oil demand growth has been slowing down. Goldman Sachs' oil research head, Daan Struyven, expects that currently, China's oil demand growth rate has slowed to about 0.2 million barrels per day, compared to 0.5-0.6 million barrels per day in the five years before the COVID-19 outbreak.

Russell Hardy, CEO of Vitol Group, said that China's shift towards electric vehicles will lead to domestic gasoline demand peaking early this year or next.

On the supply side, thanks to technological advancements and efficiency improvements, US shale oil and gas production has grown by 30% over the past 3 years, nearly offsetting OPEC's production cuts efforts. This has increasingly highlighted the pressure on oil prices as the prospects of slowing demand are being applied to current oil prices. With the Biden/Harris administration striving to push commodity prices as low as possible ahead of the elections, actual gasoline prices are nearing historical lows.

Note: The top chart shows US crude oil production, and the bottom chart shows OPEC crude oil production.

Looking at the volatility of oil prices this week, an interesting phenomenon is that every morning at 10 am Eastern Time (10 pm Beijing Time), Brent crude oil prices encounter a short-lived sell-off wave.

In terms of the crude oil forward curve, the spot premium that was bullish 2-3 months ago has almost disappeared. The Brent crude oil 12-month price differential has dropped from $4 in the past month to $1, and the entire curve is quickly shifting from a spot premium state to a bearish futures premium state.

Note: The trend of spot premiums from top to bottom is 3 months ago, 1 month ago, and currently.

The volatility index for oil, OVX, has also recently risen sharply, although it is still below the panic level in early August.

Note: The purple line above represents the trend of oil prices, and the yellow line represents volatility.

A comparison shows that the OVX, as the "panic index" of the oil market, is currently much higher than the VIX, the "panic index" of the US stock market.

From the perspective of related markets, the current decline in oil prices seems to have significant implications for some other related assets and even for Fed decisions. For example, oil prices have been closely following the US dollar for quite some time, partly because the US has transitioned from an oil-importing country to an oil-exporting country. Does this mean that the US dollar will further decline?

Note: The yellow line represents oil prices, and the purple line represents the trend of the US dollar.

Meanwhile, as we mentioned earlier this morning, the decline in oil prices is causing the US 10-year breakeven inflation rate to also fall. The Fed may need to face the risk of inflation falling too low in the future...

If the oil price and the 10-year US Treasury bond yield, known as the 'anchor' for global asset pricing, are put together, does the simultaneous decline of the two mean that the Federal Reserve is accelerating its interest rate cut in order to do so?

Finally, it needs to be reminded that the domestic stock investors and the csi 300 index have been 'shoulder to shoulder' as 'good friends' for over a year. Lately, this scene seems to be quite obvious...