Text | Fu Xiaotong
Since the birth of the modern industrial revolution in 1859, oil has been the most important raw material for the entire energy and chemical industry, and it has been called the blood of industry. Compared with other commodities, such as black, colored, and precious metals, crude oil exceeds the sum of these major commodities. At a macro level, because many governments' monetary policies are now rivet inflation, crude oil has become one of the most important variables affecting the macro economy.
There are many factors affecting the trend of crude oil. If all are considered, there may be at least 200 to 300 factors. But in daily oil price analysis, it is impossible to consider so many factors together. So I divided the analysis into several categories—macro factors, supply and demand factors, financial market factors, geopolitics, and weather factors.
The following content will be developed in three parts. The first part is the characteristics of crude oil market analysis. The second part is the analysis of supply and demand factors, geopolitical and weather factors are covered, and the demand section is combined with the economic cycle for analysis. The third part is the analysis of financial market factors.
Crude oil market analysis characteristics
The degree of effectiveness of different commodities is very high, and the degree of validity of the crude oil market is very high. For a market with very high market efficiency, the current price reflects not only history but also the status quo, but also reflects expectations for a long period of time. To give two simple examples, one is the expected management of the OPEC production reduction agreement, which has a very large impact on prices at the beginning of the production cut. I made a deduction myself at the beginning of May 2017 - I think OPEC will have a chance to cut production at the May 25 meeting. At that time, the price of oil was 44 US dollars. I gave this extension of the increase of 8 US dollars. This 8 dollar rise is mainly compared with the two in 2016. If it doesn't work, I think the space for the decline will be much smaller than the $8, because in the case of $44 at the time, the market is actually more pessimistic, and it has partly reflected the situation that the extension of production cannot be achieved. After the oil price trend, we also saw that on May 25, it reached $52. When I did this deduction, it actually rose by $8.
Another feature is that oil prices will react to prices in advance due to expectations, and prices will react in advance, thus changing supply and demand. In recent years, the reaction above the hot shale oil is very obvious. We can see that in fact, at the end of 2016, before OPEC officially started the production reduction agreement, the fund has actually pushed the oil price up to 55 US dollars, and it has been a long period of time. During this time, it is the shale oil company's annual spending plan for the next year. At the $55 position, shale oil companies can carry out a large amount of hedging, so that they can increase capital in the next year's spending plan. Expenditure is conducive to an increase in shale oil production. What we saw later was the increase in shale oil production that exceeded expectations in the first half of 2017, which is a very obvious feature in the crude oil market.
There is also a situation where people who do crude oil market analysis usually pay attention to data published by some large organizations, such as IEA, OPEC, and EIA. They regularly publish forecast reports, usually at least once a month. The forecast of supply and demand in their report is also used by people who do oil price analysis. However, there are some problems with their predictions, that is, they will continue to correct the supply and demand data. So when you look at it, their predictions are very accurate, but in fact, this is because the results of constant revisions are actually not accurate in the current period. For example, let's take the example of 2017. In the second quarter of 2017, the performance of oil prices at that time was very poor. Then we find that the supply and demand forecasts of these institutions are actually more pessimistic. However, with the bottoming out of oil prices after the end of June 2017, the agency continued to cut supply forecasts, and the increase in demand was in fact very different from their analysis in the first half of the year.
Then there are some other characteristics, because the supply and demand of crude oil is actually global, it may be difficult for everyone to see an overview of the current global whole, so there will be some inherent concepts in the crude oil market, commonly used in some media. Words, such as shale oil production increase, OPEC production cuts, etc., will actually have an impact on oil price trends.
Analysis of supply and demand factors
After talking about the crude oil market and the characteristics and problems in the oil price analysis, this section focuses on the supply and demand of crude oil.
First, the supply end
At the supply end, it was relatively easy to analyze before the shale oil revolution. Because for conventional crude oil, it usually takes 6 to 10 years for a new project to go from exploration to mining to the final production of oil. Therefore, the conventional crude oil production is relatively slow in response to oil prices. In the previous analysis, it may only be necessary to track the progress of these projects, and you can probably do a better analysis. However, shale oil is completely different from conventional crude oil. Shale oil is a high-growth, high-attenuation, usually attenuating 60% of production in the first year, and the increase in production is mainly concentrated in the first three months of the oil. From shale oil to oil, it can usually be completed in 4 to 6 months, which makes it a very important marginal production. And because American shale oil companies, their operations in the financial market are relatively mature, they can lock in some costs through the hedging, which makes the shale oil very flexible in response to oil prices.
Regarding shale oil production, I think that the company's financial report still needs to be focused on. Pay attention to its capital expenditures. Because of the high growth and high attenuation characteristics of shale oil I mentioned at the outset, if companies want to maintain shale oil production, they need constant new wells. The new well-drilling is a relatively capital-intensive thing, so it is very necessary to have the injection of funds. But what we are seeing is that, after the start of shale oil, the profitability of the entire company is actually not good. Prior to this, in fact, investors are more concerned about the dividend expectations of its industry, and it is expected that the future profitability of shale oil will be better. However, after the release of the shale oil report in the second quarter of 2017, the profitability was actually the worst in recent quarters. This has led to a certain shift in the mindset of shale oil companies, who are asking shale oil companies to pay more attention to the sustainability of corporate profit growth. That is to say, there are some very detailed changes. In fact, we must pay attention to the shale oil.
Speaking of shale oil, let's look at the impact of extreme weather on production. The reason why the extreme weather is placed in the United States is because, geographically speaking, the terrain of the north and south of the United States is more susceptible to the impact of the Atlantic Ocean. However, in fact, there are hurricane seasons every year, but not every year, the hurricane will have a significant impact on the market. Only when the hurricane season is particularly fierce, such as 2017, and earlier, it will be traced back to more than ten years ago. As in 2004 and 2005, such a strong hurricane season will have a significant impact on oil prices. In fact, this hurricane, we have statistics before, since the 21st century, landing in the United States at the third level of the hurricane (three or more is defined as a large hurricane), landing in the United States. Before 2017, only four hurricanes had a significant impact on US oil prices, two in 2005 and two in 2008. In fact, in 2008, two hurricanes, the landing level is only two, but because its landing site is concentrated in the US offshore drilling platform and refinery concentration area, it will have a significant impact on oil prices.
Let's take a look at OPEC. In fact, since the establishment of this organization, it has been a common practice for them to adjust oil prices by reducing production. Historically, they have a total of 17 reductions or frozen production. Generally speaking, if the two behaviors are relatively short, for example, within a year or a year or so, the oil price will be significantly boosted after the second production cut. However, if these two times are relatively long, then usually after the start of production cuts, we can see that oil prices tend to have a downward trend, which may be different from the inherent concept of many investors.
Judging from the historical effect of reducing production, it usually rises and falls within half a year. Usually, when the supply and demand situation is relatively tight at the time, the oil price will rise at the beginning of the production cut. However, if the supply and demand at the beginning of the production cut is relatively poor, the oil price will not be obvious at the beginning. A boost. From the long-term perspective, the oil price has been significantly boosted, and the core factor is the rapid growth of demand, which has led to a rapid improvement in the balance of supply and demand. That is what we saw after June 2017.
In contrast to the fiscal deficit rate of oil-producing countries and the time when they cut production, not every reduction in production occurs when the deficit rate is high. In 1973, OPEC decided to cut production, and the overall financial situation of the OPEC oil producing countries was still very good. They decided to do such a move at the time, which was actually related to the fourth Middle East war, including the first oil crisis that followed. At that time, OPEC oil-producing countries wanted to deter the countries behind Israel and Israel by cutting production and controlling exports. Because of their drastically reduced production behavior, it caused a very large supply and demand gap. So in the next few years, oil prices tripled, plunging the global economy, triggering the first oil crisis and a global economic recession. However, in 1986, 1999 and 2016, when OPEC cut production, the major oil producers' fiscal deficit rates were high. At that time, Saudi Arabia’s fiscal deficit rate was basically around 20%. so. OPEC's decision to cut production may not necessarily be the same behind each other.
In addition, a brief talk about the geography, this is also a market hotspot in the past year. After October last year, oil prices were significantly boosted, and geopolitical factors contributed a very important force. The geopolitical conflict in the Middle East has always existed, so its staged fermentation or non-fermentation will actually become a subject of short-term speculation. This is related to the overall global supply and demand situation at that time. If the global supply and demand situation is already tight, the premium of geopolitical conflict will be clearly reflected, otherwise it will not.
Second, the demand side
After talking about the supply, let’s look at the demand. The long-term demand change of crude oil is very synchronous with the growth of global economic GDP. So if we analyze the growth of long-term crude oil demand based on global economic growth, it is very easy to use. But if you do the analysis during the year, such as monthly and quarterly, it is not very useful. And there are also the institutions I mentioned earlier that constantly correct the impact of supply and demand expectations. In this case, it may be necessary to pay attention to some of the higher frequency indicators, such as the spread between varieties, as well as the forward curve, as well as inventory, to analyze the supply and demand of crude oil.
On the demand side, we are currently focusing on three major blocks, one is North America, mainly the United States, the second is Europe, and the third is the Asia-Pacific region, mainly China and India. Because the increase in demand in China and India in recent years is very obvious, China and India accounted for 46% of the increase in the world's major crude oil demand in 2016, which is still very impressive.
The following is a brief introduction by region and country, first look at the situation in the United States. Since 1965, the United States has been the world's largest petrochemical liquid consumer. Although it has shown a trend of crude oil demand and per capita crude oil demand decline in recent years, its absolute volume is still the largest. And if you count light hydrocarbons and bioethanol, the US petrochemical liquid supply is actually the largest in the world. The authority of supply and demand makes the US supply and demand data, in fact, the impact on global oil prices is very obvious. Of course, it also has a lot to do with the high frequency and timeliness of the release of supply and demand data. The EIA report is a frequency that can be done weekly, so it also makes the EIA weekly report one of the main trading logics in the crude oil market. These two factors together determine that in the analysis of oil prices, there is no way to ignore the situation in the United States.
From the historical performance of a US economic recovery period and the demand for crude oil, we can see that during the economic recovery period, crude oil demand is also positive. During the economic downturn, US crude oil demand is also in a state of negative growth year-on-year. From this situation, if we come to deduct, then there is a performance of US crude oil demand. Because the recovery period of the US economy since 2009 has actually lasted for about 98 months (98 months in October 2017), one of the economic recovery periods from a dozen times after World War II. In terms of performance time, this time period has been relatively long. Even if we think that it can achieve a decade of growth like 1991 and 2001, it is likely to grow again next year, and it is likely that such a negative increase will occur in the following year. Therefore, based on this, we believe that the demand for crude oil in the United States may still grow in 2018, but the increase and the performance of demand may not be as bright as 2017. Because in the bright performance of demand after the second quarter of 2017, the increase in contributions from these developed countries in OECD actually exceeded that of non-OECD countries, which is very unexpected. In 2018. The increase in the probability of OECD will continue to be less than that of non-OECD.
Then look at the situation in Europe. We have divided the performance of European crude oil demand in 1965 into four complete cycles, and the recovery of crude oil demand in these four complete cycles will last at least four years. 2015 is the starting point for the recovery of this round of European demand for crude oil. If this is the case, it will continue for at least 2018. But at the same time, we also noticed that the performance of European demand in the past four cycles is usually the best in the third year. So in this case, 2017 is the third year, and the performance of European demand exceeding expectations in 2017 is reasonable. Regarding the demand for European crude oil in 2018, it should still grow, but the growth may not be as bright as 2017.
Finally, look at the Asia-Pacific region, which is mainly China and India. Unlike Europe and the United States, the biggest primary energy source in China and India is not crude oil but coal. This has a very important relationship with the local primary energy structure, but this does not prevent the two countries from being the most important contributors to the global demand for crude oil. Then, when analyzing these two countries, we may not be able to completely compare the economic cycle with the performance of its crude oil demand. Instead, we should look more at the national development plan. From the perspective of China, according to the 13th Five-Year Plan for Energy Development in our country, it is estimated that the annual increase in demand for crude oil during the 13th Five-Year Plan period will be about 14 million tons per year, which is roughly equivalent to an increase of 270,000 barrels per day. In this case, assuming that during the 13th Five-Year Plan period, regardless of the substitution of natural gas and other non-fossil energy sources for crude oil, the five-year still can achieve a cumulative increase of 1.25 million barrels per day, our country's demand for global crude oil will increase. The contribution of quantity can still reach 20%.
For India, at an Indian Energy Forum in October 2017, OPEC expressed a view that demand for Indian crude oil has been very promising for a long time. We measured it. According to OPEC's optimistic estimate, the annual increase in Indian crude oil demand by 2040 is about 230,000 barrels per day, which is actually equivalent to China. But one thing we need to notice is that as the cardinality increases, the actual situation of the increment will be larger in front and smaller in China. Of course, India’s caste system and central control are not strong enough, or the economy cannot adjust to the growth rate as expected.
This is an analysis of our main demand for global crude oil.
Third, the inventory side
Look at the inventory situation, the first thing to look at is the US side. Supply inventory and demand data in the EIA report are actually one of the focus of the market, especially inventory. In the US inventory data, the market is most concerned about crude oil inventories. If you are concerned about the short-term changes in the crude oil market, investors will find that the weekly is usually 22:30 on Wednesday night, and at 2:30 in the winter, the crude oil market usually has a very strong reaction, because of this EIA data. Announced. In addition, there are other stocks. For example, the inventory of gasoline and diesel in the United States is also very important. Of course, the importance is not as high as that of crude oil.
Then there are some high-frequency inventory data like Europe, Japan and Singapore, but this is not a short-term trading logic for the crude oil market, but it is an indicator that we can observe changes in the supply and demand situation. There are some monthly data, for example, the countries I mentioned above have monthly data, and the most important market is most concerned about this OECD monthly inventory data. Since last year, the market has paid so much attention to the OECD's inventory, and because OPEC announced a cut in production at the end of 2016, his goal is to reduce OECD stocks to a five-year average.
Then the above mentioned pieces are actually called explicit inventory, and there is another important one in the crude oil inventory data called hidden inventory. Synchronization is very good for changes in floating positions and changes in monthly spreads.
Financial market factor analysis
After talking about supply and demand, briefly talk about the analysis factors of the financial market. First we will talk about this forward curve. The patterns of long-term curves in different periods are not the same. Usually we think that the near-high and low long-term curves indicate that the near-end supply and demand surface is very good, and on the contrary, it is considered that the near-end supply pressure is very large.
(Photo shown in October 2017)
Then let's talk about the monthly difference. Here we compare the monthly difference with the oil price and select the monthly difference of the semi-annual period, which is the price of the first month minus the price of the seventh month. We can see that it is obvious that when the monthly difference is positive, the performance of the corresponding oil price is also very strong. Judging from the performance of such a recent month's premium period in the past three rounds, during the recent month's premium period from 1999 to 2005 and 2007 to 2008, oil prices showed a clear unilateral increase. Then in 2011-2014, because the oil price was already more than 100 at the time, it did not present a very obvious unilateral rise, but maintained a strong shock. Then we also compared the world's three benchmark crude oils, namely Brent, WTI and Oman crude oil, we can see the first two times in the past three full-month premiums (because the first time Oman has not yet listed, The start and end times of the recent lunar period, which only compares the three oils of this WTI and Brent, are basically the same. But for the third time, it can be seen from 2011 to 2014 that WTI's performance is far behind Brent and Oman, which has a very big relationship with the booming shale oil revolution. At the time, there were some important structural factors, because the construction of some pipeline facilities on the land in the United States at that time could not fully meet the shale oil transportation demand, resulting in a lot of shale oil production, which was accumulated in the delivery base. So such a structural transport bottleneck has led to WTI's performance in the 2011 and 2014 cycles being far worse than Brent and Oman. So by 2017, WTI's time to start rising water in recent months is also much later than Brent and Oman.
Then this is a performance in terms of spreads. In addition, we also recommend investors to pay attention to some, such as the price difference between gasoline and crude oil, including the spread of crude oil across regions, if it is really to do crude oil analysis, it can be concerned.
In addition, you can look at the position data. In many cases, changes in positions will have a significant phase impact on oil prices. So from this position, generally we are observing weekly CFTC positions, it will have fund longs, fund shorts, as well as producers long, producer shorts such a classification. This is very good for you to observe different market participants and his behavior. Moreover, it will be found that different types of positional behavior have significant interactions with important variables such as inventory, production, and capital flow.
Usually, our main concern is the fund holdings. The net amount of funds and oil prices are very good. So there may be a lot of times when we go to see some news, it will show how many hands the fund has increased, or how many hands the fund has reduced. At this time, some people should first think that if there is a large increase in net, is there still a lot of room for growth in oil prices? Or to say that the net amount has been greatly reduced, and there is still a lot of room for decline in oil prices. What we think is not because of the large increase in net, it has led to the strength of oil prices, and vice versa. This is the end of my sharing today, thank you all.
This article was first published on the WeChat public account: Poker Investors. The content of the article belongs to the author's personal opinion and does not represent the position of Hexun.com. Investors should act accordingly, at their own risk.
(Editor: Shao Yidi HF116)
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