China explains how low oil prices could crash markets

MOSCOW, 27 Sep — PRIME. Since June, a strong dollar has led to a gradual retreat of trade leaders, and global crude oil prices have now fallen by almost 40% from their highs, writes Ma Shuang, a China Securities Journal columnist. After 8.5 months, futures for US WTI crude fell below $80 per barrel for the first time. What is happening in the world markets?

According to analysts, the current fluctuations in oil prices are mainly triggered by changes in the macro logic, such as rising global inflation, the expectation of a global economic downturn and the monetary policy of the US Federal Reserve. Faced with these fundamental problems, although oil prices are supported, it is difficult for them to meet real expectations.

The continued decline in oil prices during this period is forecast to have a positive impact on the prices of agricultural products, metals and other commodities, and especially on the prices of chemical products, which were most affected. However, improvements are expected to be modest in the short term.

U.S. crude oil WTI continues to fall from a high of $123.68 a barrel on June 14 to $78 a barrel on September 26, a cumulative decline of about 37%, according to Wenhua Finance.

“Since the beginning of this year, due to continued high levels of global inflation, major energy economies such as European countries and the United States have moved to constantly aggressively raise interest rates to curb inflation, which is putting significant pressure on the global economy. The US economy continues to decline – GDP U.S. governments have been falling for two consecutive quarters, and long-term and short-term US government bond yields have also been declining.As the largest economies, the European Union and the United States, continue to raise interest rates, global economic growth is expected to continue to decline.In this context, oil consumption will further affected, thereby suppressing oil prices,” Sui Xiaoying, head of investment advisory for medium-term futures in the petrochemical industry, told the China Securities Journal.

Li Yunxu, senior analyst at SDIC Anxin Futures Research Institute, told the China Securities Journal columnist that the stress of an economic recession will be reflected in sharp price swings in the near future.

In his opinion, it is clear from the stock market that during the current round of falling oil prices, especially since September, its volatility was strongly pegged to the dollar. However, the inter-month spread of futures, being an indicator that reflects fundamental changes much better, showed no signs of weakening recently following oil prices. To a certain extent, this means that the current fluctuations in energy prices are mainly dominated by macro logic.

Yunxu is confident that the dollar’s surge is still the main factor influencing the short-term dynamics of oil prices, but in the medium term, global demand for petroleum products at terminals and refinery operating data are still relatively stable. The International Energy Agency (IEA), the US Energy Information Administration (EIA), and OPEC have not made any significant adjustments to their oil demand forecasts for this year and next in their monthly reports for September, and the actual impact of dollar fluctuations on demand is temporarily limited .

“In the short term, supply and demand will not be able to keep the price of oil from falling further, and after the slowdown in the growth of the dollar, oil prices may recover. Now is probably a convenient opportunity to redistribute the relevant futures products,” the expert added.

Donghai energy and chemicals futures analyst Wang Yilu, in turn, notes that in terms of spot market transactions, futures futures for many petroleum products have fallen sharply since the end of July. This is due to weak gasoline consumption during the peak season this summer, falling refinery profits and reduced demand for cash goods. With the onset of the autumn-winter season, it should be noted that the demand for heating has become more stable than the demand for travel. If OPEC+ cuts oil production, then the control center for crude oil prices in the fourth quarter may feel some support.

Sui Xiaoying notes that from a fundamental point of view, the current structure of supply and demand for crude oil maintains a tight balance. And, although the recession has significantly reduced oil consumption, insufficient supply keeps the supply of crude energy in the market at a low level. The impact of a further economic downturn on oil consumption is assured, but the supply of crude oil is affected by geopolitical factors and new variables will definitely emerge in the future.

It is difficult to change the position of the downstream assets for the better.

Crude oil is known as the “blood of the industry” and its end products are plentiful. It is the most important feedstock for refined petroleum and refined products, and often has a direct impact on the price of gasoline and diesel, heating oil, tar, PTA and other commodities.

As for the impact on refining of this round of falling crude oil prices, according to Li Yunxu, “70% of crude oil end products belong to areas closely related to transportation and travel, such as gasoline and diesel, as well as transportation costs. all segments of the population, and directly correlates with the consumer price index. Further price declines will also have a negative impact on the final cost of agricultural products, metals and other goods.”

Wang Yilu analyst predicts that the ongoing weakening of crude oil prices has already significantly reduced the cost of a range of commodities, including the energy and chemical chain. Commodity support is expected to weaken further, as well as a show of weakness on the part of energy and chemical products in the next two quarters.

Wang Yilu added that it is better for investors to look for opportunities among commodities showing monthly declines, rather than unilaterally sticking to transactions in extremely volatile products. As for oil and gas itself, supply may remain scarce for a long time, and large companies, including oilfield services, gas pipelines and gas stations, will have long-term distribution value.

“The fall in crude oil prices will lead to a decrease in the cost of production of petrochemical products, which in turn will reduce their cost. Thus, the general reverse trend of petrochemical production will follow the decline in crude oil prices,” Xiaoying concluded.