Demand is suppressed, supply disruptions are constant, how will crude oil go?

In mid-to-late August, the energy crisis in Europe intensified, but the international crude oil price rose relatively indifferently
than natural gas, which is expected to be very tight.
At present, the global economy is facing the risk of deceleration or even recession, but unlike previous recession cycles, this recession is generated in a high inflation environment, and the cause of high inflation is not only the demand side, but also supply disruption
.
Therefore, during this economic slowdown or recession, affected by geopolitical crises (Russia-Ukraine conflict), supply chain disruptions and shrinking capital expenditures, crude oil prices may fall relatively slowly or lag, and even a pulsed rebound
in the case of heightened supply concerns is not excluded.
From the perspective of monetary policy and economic cycle, it does not support a sharp rebound in crude oil prices, but supply disruption supports crude oil prices to resist decline
.

Monetary tightening dampens demand

From the perspective of commodity pricing mechanism, depending on supply and demand, and monetary policy has an impact on demand, tightening monetary policy will inevitably inhibit the expansion of commodity demand, and energy demand such as crude oil is no exception
.

On August 26, at the high-profile Jackson Hole annual meeting of global central banks, Fed Chairman Powell delivered a hawkish speech, reiterating that "inflation does not stop, interest rates do not stop", and said that there will be no rush to cut interest rates after raising interest rates
to a level that is restrictive to economic growth.
This is a very clear response
to market expectations for the Fed to turn in 2023.
This means that at the upcoming meeting, the Fed will continue to put interest rates above the neutral level by raising rates sharply, and above the neutral level for some time - possibly through the whole
of next year.
There is no doubt that the Fed is far from stopping its efforts to reduce inflation, with swaps pricing in a final interest rate of 4%.

Speaking at the annual meeting of global central banks in Jackson Hole, Powell said that it is allowed to curb inflation at the expense of a moderate slowdown in economic growth, especially to match supply and demand through cooling demand, because the current high inflation in the United States is indeed also a product of strong demand and supply constraints, and the Fed's tools are mainly aimed
at aggregate demand.
Therefore, the Fed will continue to allow the US Treasury yield curve to continue to invert.

What makes this round more special is the complexity of short-end inflation, such as supply factors and structural shortages in the job market, which may make the entire inflation last for a long time, and it is not so easy to fall
back quickly.
At this time, it is necessary to maintain the high-pressure momentum
of monetary tightening.

As for the US inflation indicator falling in July, it is not possible to predict the overall inflation trend
by changing inflation indicators in a single month.
Powell said that in the current situation, inflation is well above 2%, and the job market is extremely tight, even after reaching the expected level of long-term neutral interest rates, it is not time to
stop or pause.

From the perspective of trading strategy, historical experience shows that if you see a flat or even inverted interest rate curve, inflation turning back, and expectations of an economic slowdown, you can lay out the Fed's next round of easing trading strategy
.
However, this round is different, and the current short-lived inflation is too far from the central bank's target, unlike the low inflation environment
of the monetary tightening in 2016-2019.
Therefore, for crude oil, demand will still be suppressed
.

From the perspective of US crude oil demand, due to the tightening of monetary policy, the economy has produced a certain negative drag, such as real estate, household consumption and manufacturing indicators are slowing down
.
According to OECD estimates, global crude oil demand in the second quarter of 2022 was about 98.
56 million barrels per day, down 0.
8% from the first quarter and up only 3.
1%
from the same period last year.
According to data released by the US Energy Information Administration (EIA), US gasoline demand fell sharply by 914,000 b/d in the week ended August 19, the second largest decline so far in 2022; The four-week demand rolling basis also fell 2.
24 percent to 8.
86 million b/d, just above the same period
in 2020.

The figure shows the estimated global crude oil consumption and year-on-year growth rate

Supply disruptions have not gone away either

The current supply disruption in the international crude oil market comes from the restrictions on Russian crude oil exports under the Russia-Ukraine conflict, and OPEC countries such as Saudi Arabia do not want to see Iranian crude oil flow into the market, so OPEC and others may reduce production after a certain decline in oil prices in order to compete for international crude oil pricing power
.

According to data released by OPEC's monthly report, in July 2022, OPEC crude oil production increased by only 216,000 barrels / day from June, of which Saudi Arabia's monthly production increased by only 158,000 barrels / day, slowing down to 13.
7% year-on-year, and the year-on-year growth rate in June was as high as 18.
5%.

On August 22, Saudi Energy Minister Abdulaziz Aziz Johnson announced that Saudi Energy Minister Abdulaziz Aziz Aziz Aziz Abdulaziz Root? Salman warned that "extreme" volatility and lack of liquidity meant that the crude futures market was increasingly disconnected from fundamentals, which could force OPEC+ to
cut production.
As Iran's longtime rival in the Middle East, Saudi Arabia has been critical of the Iran nuclear deal reached during the Obama administration
.
In addition to "demonstrating" to the United States and Iran, Saudi Arabia also hopes to use the new production cut agreement to consolidate the duopoly with Russia in OPEC+ and maintain the market's high oil prices
.
According to the probability of the OPEC meeting meeting as measured by CME Group's OPEC Watch Tool, the probability of OPEC maintaining crude oil production or increasing production slightly in September is 68.
32%, while the probability of reducing production is also 31.
49%, and the probability of a significant increase in production is less than 1%.

The chart shows the probability of the outcome of the September OPEC meeting as measured by the CME Group's OPEC Watch Tool (data as of August 29)

In addition, it is still difficult
for Western countries to reach a new nuclear deal with Iran.
Iran said it would not respond to the Biden administration's reply to the EU text until at least September 2, and that negotiations on the nuclear agreement would be extended until September
.

It is worth noting that the US strategic reserve has been released, which may lead to tighter
international crude oil supply.
Data released by the US Energy Information Administration (EIA) showed that in the week of August 19, the overall US oil exports were 11.
076 million b/d, a record high; The U.
S.
Strategic Petroleum Reserve fell by
8.
1 million barrels, the largest weekly decline in history.
Biden's emergency release of strategic petroleum reserves is 180 million barrels of oil, and relevant agencies estimate that after Iran reaches a new nuclear agreement, about 93 million barrels of Iranian crude oil and condensate will flow to the market, assuming that the Iranian nuclear agreement is finally reached, it is still impossible to hedge the gap
left after the release of the US strategic oil reserve.

In short, the current international crude oil price may still maintain a high oscillation trend, from the demand point of view, because the global economy is likely to be in a slowdown or recession cycle in the next 1-2 quarters, and the Fed's monetary tightening will further curb demand
.
However, due to the interference factors of crude oil supply, it is unlikely that there will be a large-scale surplus of crude oil, and the global excess of crude oil is estimated to be only 1.
2 million barrels per day in June 2022, and there is no risk of
a sharp decline in oil prices in the short term.
Investors can use CME Group's WTI Crude Oil Futures (contract symbol: CL) to seek swing trading opportunities
.
In addition, for the OPEC meeting held on September 5, WTI crude oil weekly options ((LO1, 2, 3, 4, 5) are also a very suitable tool for managing oil price fluctuations at that time, because the expiration date of the option contract is every Friday, so investors can choose contracts with an expiration date of two Fridays before and after the OPEC meeting, that is, September 2 or September 9 for risk management
。 For small investors with limited funds, CME Group also offers Micro WTI Crude Oil Futures (MCL) and Micro WTI Crude Oil Weekly Options (MW1, 2, 3, 4, 5), which are only one-tenth the size of the standard contracts mentioned above, require lower margin, and are more suitable for small investors
.