Although the ill-fated crude oil production reduction agreement has finally seen its first light in the near future, it still can not stop crude oil futures from opening an epic volatility.

On April 20, the price of the expiring US crude 05 contract (light crude oil futures for May delivery) on the New York Mercantile Exchange plunged 305.97% to close at-37.63 US dollars per barrel, while on the evening of the 21st, the June contract of US Oil also fell as much as 70%.

The negative oil price means that the cost of crude oil transportation and storage exceeds the value of crude oil itself, causing crude oil futures investors to sell at inverted prices.

The main reason for this extreme phenomenon is the cliff decline in global crude oil demand under the cover of the epidemic, serious overcapacity and increasingly scarce storage space. as a result, the spot crude oil that is about to be delivered has become a "hot potato" among traders.

When will the real bottom of oil prices come?

At present, the rate of production reduction announced by OPEC+ is only half of the decline in market demand.Considering that global storage capacity may be exhausted from June to July, crude oil prices may reach a real bottom by then.。

Oil with nowhere to put

Stanley Crowe, a famous American futures expert (March 5-1999) (Stanley Kroll), once described his "Battle of White Sugar" in his book "Crowe's Investment Strategy":

"there has been a phenomenon that the futures price is lower than the agricultural price in the international agricultural futures market. For example, in the white sugar futures market, the price of sugar is lower than that of bags. It's like sugar for free. This is mainly due to the limited storage conditions of sugar, which will melt. On the other hand, the sale can at least recover the cost of the bags. "

According to relevant reports, Stanley Crowe did long sugar futures in 1967.

At that time, he repeatedly tested his hypothesis and studied the market and technical graphics. at the same time, he also asked his peers about the operation skills of white sugar futures, and finally thought that it was an opportunity to bet on white sugar futures around 2 cents / pound.

At that time, the cost of sugar sacks and the labor cost of sugar alone were more than 2 cents. Sugar is the equivalent of a free product.

However, the reality is cruel. After Stanley Crowe "bottomed out", the market did not immediately rebound, white sugar futures prices continued to decline, and bottomed out at 1.33 cents / pound, down more than 30%.

Like sugar at that time, today's crude oil is facing a supply glut that there is no place to store it.

1. The demand for crude oil falls off the cliff.

According to the report "Assessment of the impact of Urban blockade on Global Energy consumption" by the Institute of Energy Economics of Japan, as of April 7, 120 countries around the world have issued home orders to residents, involving about 4.1 billion people.

Among them, Asia accounts for a higher proportion, but North America and Europe have a higher degree of industrialization, which has a greater impact on crude oil demand.

Due to the high car ownership in Europe and North America, the urban blockade has a greater impact on the decline in crude oil demand.

Japan's energy economy expects the global urban blockade to reduce energy demand by about 4.1 million tons of oil equivalent per day, of which oil demand fell to 18.1 million barrels per day.

two。 Crude oil storage capacity is in jeopardy

According to the statistics of Longzhong Research, there is not much remaining storage space for crude oil and oil products in the world, coupled with problems such as poor infrastructure and transportation logistics caused by the epidemic, which have also increased the difficulties of crude oil circulation.

S&P Global Inc. Global Platts estimates the global potential storage capacity of crude oil, petroleum products and liquefied natural gas at 1.4 billion barrels, of which:

• The land storage capacity is about 1 billion barrels.

• The storage capacity at sea is about 400 million barrels.

Even if a full reduction in OPEC production is considered, the storage space will be used up within four months at the slowest time. Once the warehouse is filled, subsequent physical delivery will be more difficult.

Take Cushing, an inland oil-producing town in the US, as an example. According to Citic Futures Research Institute's statistics on US EIA inventory, the current net inventory utilization rate in Cushing is as high as 69 per cent.

Let's make a simple calculation: Cushing's US crude storage capacity could be filled in about five weeks without taking into account reduced production by shale oil producers. Commercial crude oil storage capacity could be filled in about four months.

The real bottom of oil prices may be from June to July.

In order to contain the continuous decline in oil prices, through the mediation of Saudi Arabia and Russia, OPEC+ issued a statement on April 12th, announcing the largest production reduction agreement in history.

OPEC Secretary General Balkin described the reduction in crude oil production as historic:

(OPEC + production reduction Agreement) large-scale production reduction, lasting for a long time, lasting for two years, today witnessed the victory of international cooperation and multilateralism, which is the core of OPEC values. All OPEC, non-OPEC and other oil-producing countries have opened a new chapter in the history of the oil world.

It is understood that this production reduction process is divided into three steps:

The first step: reduce production by 9.7 million barrels per day from May to June 2020 (the largest reduction in history).

The second step: reduce production by 7.7 million barrels per day from July to December 2020.

The third step: reduce production by 5.8 million barrels per day from January 2021 to April 2022.

Among them, Saudi Arabia and Russia have production reduction benchmarks of 11 million b / d respectively, and the pace of production reduction is 2.5 million b / d each.

According to the follow-up trend of oil prices, the next OPEC+ videoconference will decide on future actions to balance the market on June 10, 2020.

Meanwhile, Saudi Energy Minister Abdulaziz said the G20 countries outside the OPEC+ (the United States, Brazil and Canada) have pledged to cut oil supplies by 3.7 million barrels a day.

Assuming that the OPEC+100% implements the agreement and the G20 countries implement 3.7 million b / d production cuts, production in May is ideally about 10 million b / d lower than in February.

But more institutions predictThe current efforts to reduce production are still unable to effectively hedge against the decline in demand caused by the epidemic.。

The market generally expects crude oil demand to decline by about 20 million barrels per day in the second quarter, but production will be cut by 10 million barrels per day, only half of the decline in demand.

According to IEA's forecast, even if the supply side is reduced by 10 million b / d, global oil inventories are expected to increase by 15 million b / d in the second quarter.

According to our calculation of the balance sheet of supply and demand, we expect the supply and demand situation in the second quarter to be the most severe quarter in 2020, and we judge that the accumulation range is more than 10 million barrels per day.

In addition, taking into account some differences within the OPEC+, the G20 as a whole also lacks an effective government restraint mechanism, the overall coordination is difficult, and the subsequent implementation of production reduction may be lower than expected.

In the short termAs the OPEC+ production reduction agreement cannot hedge against the impact of the decline in demand caused by the epidemic, the fundamentals of crude oil prices will continue to collapse, and prices are expected to face severe shocks at low levels.。

Considering that global storage capacity may be exhausted from June to July, we think crude oil prices will usher in a big test and a real bottom.

Future view of crude oil market

Nevertheless, the largest production reduction agreement in OPEC+ history is positive and will play a key role in slowing the rise in global crude oil inventories.

If we go back to the root of solving the problem of crude oil prices, there are two situations that may bring about important changes in crude oil prices:

1. In the short term, if the demand for the global epidemic improves and the closure measures of cities around the world are liberalized, the price of crude oil may usher in a phased inflection point.

2. If the global epidemic disappears completely in May because of the successful development of the vaccine, none of the above inferences are valid. Crude oil prices will reach an absolute inflection point in May.

On the other hand, long-term crude oil prices are not pessimistic.

From the point of view of commodity attributes:

1. The epidemic situation has improved and the demand is expected to improve marginally after the release of the closure and control policy.The problems of low oil prices and depletion of oil storage space will lead to capacity withdrawal.To widen the supply gap.

Superimposing the debt maturity of US shale oil companies, we believe that some of the exited capacity will never be able to return to the market.

Similar to the decline in demand that exceeds market expectations, if the global crude oil market expands from June to July, the decline on the supply side will also exceed market expectations.

2. The long-term marginal change on the supply side will be greater than that on the demand side (mainly due to the slowdown in the growth of non-OPEC capacity-2020 is the end of the rapid release of capacity).

Even if there is no 2020 epidemic and low oil prices, the pace of non-OPEC production capacity will slow down and OPEC market share will increase in 2021. The marginal growth rate of supply will decline.

3. Geopolitical risk will magnify price fluctuations when there is a supply gap and destocking. Due to the deterioration of national financial situation in the Middle East compared with the period of high oil prices in 2014, and Iran seriously affected by the COVID-19 epidemic, low oil prices will further increase the risk of geopolitical events in the Middle East in the future. this leads to a periodic shortage of crude oil supply.

From the perspective of financial nature, the QE policy adopted by various countries to deal with the economic impact of the epidemic may push up commodity prices from the perspective of liquidity in the long run.