Oil Prices Plunge!
Since entering September, international crude oil prices have fallen by nearly 10%, with a cumulative decline of 22% from the high point in April this year, entering a bear market.
The reasons for the sharp drop in oil prices are complex, mainly divided into three aspects: 1.
Excess Crude Supply: The United States, in an effort to reduce domestic inflation, has been aggressively increasing production against the backdrop of OPEC's production cuts.
At the same time, to limit Russia's sources of war funding, the U.S. has tacitly allowed former rivals Iran and Venezuela to significantly increase production.
Over the past year, the U.S. has increased production by 1 million barrels, and Iran has also increased production by 1 million barrels, which has essentially offset OPEC's production cuts.
Within OPEC, not all countries are major players like Saudi Arabia; some are still waiting to sell oil for survival, leading to internal divisions and issues with the implementation of production reduction plans.
2.
Declining Demand: The global economy is currently very sluggish, and the lagged effects of high interest rates in the United States are beginning to appear.
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Regardless of whether it's a soft landing or a recession, the direction of demand is downward.
The domestic economy is even worse, with the real estate downturn cycle already forming a TS pattern, and demand is not going up in the short term.
The two major engines of the global economy are both contracting in demand; how can crude oil be good?
The latest OPEC monthly report has also revised its expectations, predicting that global crude oil demand growth in 2024 will be 2.03 million barrels/day, down from the previous expectation of 2.11 million barrels/day.
It is expected that global crude oil demand growth in 2025 will be 1.74 million barrels/day, down from the previous expectation of 1.78 million barrels/day.
3.
300 Million Barrels of Strategic Reserves: I have been hesitant to short crude oil, mainly because the United States still has not replenished the 300 million barrels of strategic crude oil reserves consumed during the pandemic.
Once the U.S. sees cheap prices, it will immediately have the motivation to replenish its strategic reserves, providing a bottom for crude oil.
However, it seems that the U.S. does not have the intention to replenish its reserves in the short term.
(But the U.S. has the pump, and it can raise oil prices by pumping, or let them fall by not pumping.)
However, these reasons are not the most important factors now, as the economic cycle fluctuates, and demand will naturally rise when it falls.
U.S. shale oil also has a cost bottom line, and strategic reserves will eventually be replenished.
However, I have seen a piece of data that has made me doubt the prospects for oil prices; the impact of new energy on oil prices may exceed everyone's imagination.
Let's look at a set of data: U.S. vehicle mileage has returned to pre-pandemic levels, but there is a very strange phenomenon - U.S. gasoline consumption has significantly decreased.
The reason is that gasoline demand is affected by the improvement of vehicle fuel economy, as well as the impact of more hybrid and EV vehicles.
Previously, Saudi Aramco estimated in its prospectus that 2035 would be the peak of global crude oil demand; will it come earlier now?
According to the latest data, in August, China's new energy passenger car retail penetration rate once again exceeded 50%, reaching 53.9%.
This is the second time after July this year that the Chinese new energy passenger car market has exceeded 50%.
At the same time, data released by the General Administration of Customs shows that in the first eight months, China's crude oil imports were 367 million tons, a decrease of 3.1%.
From January to June 2024, China's large-scale industrial crude oil processing volume was 360.09 million tons, a year-on-year decrease of 0.4%.
According to the data in the article "Finished Oil Consumption Shows a Downward Trend" published in the August 12, 2024 issue of "China Petroleum and Chemicals" magazine, it is expected that in the first half of 2024, China's finished oil consumption volume will be 175 million tons, a year-on-year decrease of 1.4%.
(In the first half of the year, GDP grew by 5% year-on-year, and total electricity consumption grew by 8.1% year-on-year).
In the first half of this year, BYD announced its fifth-generation super hybrid technology, with a fuel consumption of 2.9L per 100 kilometers, far lower than the fuel consumption level of traditional fuel vehicles!
Although this data is a bit inflated, there is not much of an essential difference between saving 70% and saving 80%.
It is useless to be so serious about it, as long as it far exceeds the fuel vehicles.
In addition to the commonly used gasoline, the replacement of traditional diesel vehicles by electric vehicles or hydrogen energy and natural gas vehicles in the engineering vehicle field is also inevitable.
For example, in the first half of the year, diesel consumption decreased by 6.3%.
According to the forecast of the China Petroleum Planning Institute, in the northwest and northern regions of China, the replacement rate of liquefied natural gas fuel trucks in seven provinces in 2024 will exceed 50%, with Ningxia and Xinjiang's proportion exceeding 60% to 70%, making them the only two provinces with a proportion exceeding 50% in 2024.
From a global perspective, overall crude oil demand is generally average (decomposed structure: transportation finished oil 60%, chemical oil 20%, industrial oil 10%, infrastructure oil 10%).
It can be imagined that at the current pace, global automotive oil demand will soon reach its peak.
If the electrification accelerates globally in the next few years, the downward spiral of crude oil demand is also likely to occur.
The current decline may just be the beginning, and crude oil, as the mother of commodities, will have a key impact on the entire commodity market.
Market expectations suggest that the peak of global crude oil demand may be advanced to 2027.
However, according to the latest data from the first quarter of 2024, the average cost of new wells, completion, and production for U.S. shale oil is about $65 per barrel, the survey in the first quarter of 2023 was $61 per barrel, and the survey in the first quarter of 2022 was $50 per barrel.
Therefore, WTI at $65 per barrel is basically the bottom line for U.S. shale oil companies' oil prices, which corresponds to Brent at around $70 per barrel.
Coupled with the fact that the U.S. still has a large amount of strategic reserves to replenish, there is a bottom to crude oil prices, and the supply side of U.S. shale oil is also close to the top.
However, OPEC still has 6 million barrels of production capacity that has not been released.
It is not easy for oil prices to go down, and it is also not easy to go up.