Crude oil turned to excess, OPEC+ meeting is likely to maintain production cuts

In mid-to-late November, international crude oil prices fell
significantly from the high set at the beginning of the month.
We found a rapid convergence of WTI crude oil spreads, a shift in the spread structure from the previous Backwardation to Contango, and a repairing widening of the Brent and WTI spreads, which means that crude oil supply concerns have eased
significantly.

From the perspective of supply and demand structure, due to the high possibility of recession in developed economies such as Europe and the United States in 2023, the forward demand for crude oil will weaken significantly, and in the near future, due to the support of OPEC production cuts and sanctions on Russian crude oil, crude oil prices will face a new round of downward risks
after digesting supply factors.

The risk of recession in Europe and the United States has risen, but high inflation has led to interest rate hikes in Europe and the United States

From the perspective of many economic indicators, the risk of recession in Europe and the United States has increased
significantly.
For example, in October, the Eurozone manufacturing PMI continued to be below the 50-boom-dry watershed, while the US manufacturing PMI also fell back to 50.
2, about to fall below the
50-boom-dry watershed.
For the United States, falling consumer confidence and a sharp cooling in real estate mean that the balance sheet of the private sector is deteriorating
.

The deep inversion of the U.
S.
Treasury yield curve reflects the weakening of the U.
S.
economy and partly indicates the risk of
recession in the U.
S.
economy over the next year or two.
According to the Bloomberg Global Aggregate Bond Sub-Index, the average yield on sovereign bonds maturing 10 years or more is already lower than the yield on bonds maturing 1-3 years, which has never happened since 2000
.

However, the Fed and the ECB faced high inflation and had to continue raising interest rates
amid the economic slowdown.
On November 28, New York Fed President Williams, who permanently has voting rights in the Federal Reserve's monetary policy committee FOMC, said the Fed would do more to curb inflation
.
Despite the recent easing of supply chain challenges, inflation remains "too high"
.
Bullard, the president of the St.
Louis Fed who has voting rights at this year's FOMC meeting, said financial markets underestimated the odds that Fed policymakers would need to raise interest rates more aggressively next year to suppress inflation, and there was "still a large amount" expectation that inflation would naturally fall
.
The Fed needs to raise interest rates to at the low end of its 5.
0% to 7.
0% range to meet its goal
of making interest rates sufficiently restrictive.

There is a possibility that global crude oil production will decline

According to data released by the U.
S.
Energy Information Administration (EIA), global crude oil supply in October was about 102 million barrels per day, up from 97.
56 million barrels per day in the same period last year, of which OPEC crude oil supply reached 34.
79 million barrels per day
.

According to OPEC monthly report data, OPEC crude oil production in October increased by 7.
6% from the same period last year to 29.
494 million barrels per day, but down 0.
71%
from September.
Among them, Saudi Arabia, the largest oil producer in OPEC, fell to 10.
838 million barrels per day in October and rose to 10.
987 million barrels per day in September, but increased production by 1.
072 million barrels per day
from a year earlier.

As agreed at the OPEC+ meeting on October 5, the production target will be cut by 2 million barrels
per day from November.
Among them, Saudi Arabia's daily production quota from November to the end of next year was reduced to 10.
478 million barrels, and according to October Saudi production, Saudi Arabia's crude oil production in November was 360,000 barrels per day
lower than in October.
At present, only some OPEC members will implement the agreed production cuts, with major oil countries such as Saudi Arabia and the United Arab Emirates being the main force in the cuts, while other members have already produced below their quotas
due to years of underinvestment or domestic political instability.

In terms of U.
S.
crude oil production, U.
S.
crude oil production remained at a high of 12.
1 million b/d in the week ended November 18, an increase of 600,000 b/d from the same period last year, but growth was close to stagnating
in the past two months.
Although the number of U.
S.
crude oil rigs continues to rise, shale oil extraction takes time
.

The decline in crude oil demand is likely to increase

Globally, the dollar remains strong and has spurred a broad sell-off
in commodities.
For oil, these headwinds have added downward pressure
on an already fragile crude oil market.
The demand outlook is weakening
due to concerns about high oil prices and a recession.

The EIA expects global crude oil consumption to be around 99.
32 million b/d in September 2022, rising to 101 million b/d in December, slipping to 0.
94%
year-on-year.
At the end of 2022, global crude oil demand was 1 million barrels per day less than supply, that is, the global crude oil maintained a pattern of excess
.

Figure 1: The growth rate of global crude oil consumption continues to decline

Source: EIA

By country, in the past two months, the consumption of gasoline and distillates in the United States has been weak, and it has declined year-on-year
.
Data released by the U.
S.
Energy Information Administration (EIA) showed that total U.
S.
refined oil demand averaged 20.
678 million barrels per day in the four weeks ended November 18, 0.
1% higher than the same period last year; Demand for motor gasoline averaged 8.
685 million barrels per day for four weeks, 7.
0%
lower than a year earlier.

As the world's largest consumer of crude oil, China's crude oil demand continues to be hit by the coronavirus pandemic and has not been able to recover, according to our estimates, the current Chinese crude oil demand is about 1 million barrels per day below the 2020/21 level, and it is expected that it will take the second quarter of 2022 to return to the consumption level
of 2020-2021.

There is uncertainty about sanctions against Russian crude oil exports

In November 2022, Russia's oil production quota under the OPEC+ deal will be reduced from 11 million b/d to 10.
5 million b/d
.
In October, Russian oil production, including condensate, was 1.
47 million mt/d, or 10.
78 million b/d, slightly lower than the 10.
8 million b/d
reported in September.
Some institutions predict that when the EU embargo on Russian crude imports comes into effect, Russia's oil production may fall to 9 million barrels per day
in December.

Previously, some institutions predicted that about 2 million barrels of crude oil exported by Russia per day would be forced to cut production
due to the lack of a buyer.
There is still huge uncertainty
about how much the EU sanctions, which will come into effect on December 5, or whether they will have any impact.
At the end of November, EU member states were working to agree on a price limit on Russian shipments to allow the use of European ships and international trade insurance
.
The EU's proposed price cap is $65 per barrel, which is higher than the current selling price of Russia's flagship Ural-grade crude and therefore has little impact on Russian crude exports
.

Therefore, there are downside risks to international crude oil prices in the future, and investors can use CME Group WTI crude oil futures (symbol: CL) to hedge this risk
.
OPEC+ will hold a new round of meetings on December 4 to discuss
production policies for 2023.
Investors can pay attention to the results of the meeting calculated by CME Group's OPEC Watch tool, as of November 30, the probability that OPEC+ will maintain the previous production cut agreement unchanged or slightly reduce the production reduction is high, reaching 74.
3% (see chart below).