Should You Buy The Oil Price Dip?
After a sharp drop from mid-April to May, international crude oil stopped falling and rebounded in June.
Looking forward to the market outlook, we believe that the crude oil market will usher in several positives: the summer U.S. car travel season will drive gasoline consumption, the U.S. will repurchase crude oil to replenish strategic reserves, the possibility of the Fed cutting interest rates in September will increase due to cooling inflation, and China's economic recovery will bring import demand in the third quarter pick up. The risk factor is that OPEC's resumption of production exceeds expectations, leading to a sharp rebound in supply.
Short-term supply contraction, medium-term or recovery expansion
In the second quarter of 2024, global crude oil production will continue to shrink. According to statistics from relevant agencies, in May, global crude oil production was about 102 million tons per day. Among them, OPEC crude oil production fell to 26.629 million barrels per day in May.
As for Russia, Russia has carried out the largest production reduction this year, but the production is still higher than the target. Moreover, Russia's crude oil exports have also maintained rapid growth, especially exports to China, India and other Asian countries have offset the reduction in exports to Europe.
In the United States, crude oil production remained high, rising to 13.2 million barrels per day in the week ended June 7, after remaining at 13.1 million barrels per day from March 8 to May 31. In June, U.S. crude oil rig data fell again, falling to 488 in the week of June 17, which may limit the room for U.S. crude oil to increase production.
The IEA predicts that global production is expected to increase by 580,000 barrels per day and 800,000 barrels per day in 2024 and 2025, respectively, and non-OPEC production including the United States, Brazil, Canada and Guyana is expected to increase by 1.4 million barrels per day, of which U.S. supply expansion has slowed and will contribute about 45% of output growth.
In the medium term, crude oil supply will recover and expand. On June 2, at the OPEC ministerial meeting, OPEC agreed to extend the previous production reduction agreement until the end of 2025. In addition, in June, the OPEC ministerial meeting increased the UAE's official production quota by 300,000 barrels per day, which will be implemented from January 2025. From September 2025, the UAE's production quota will increase from the current 2.9 million barrels per day to 3.519 million barrels per day.
Demand ushered in two major benefits, and destocking accelerated
According to our calculations based on data from relevant agencies, in June 2024, global crude oil demand will be about 104 million barrels per day, an increase of 2.9% over the same period last year, of which China, the United States and India will contribute most of the increase in demand. For the demand in the third quarter of 2024, we expect it to grow.
Morgan Stanley research found that if global GDP growth is 3%, then oil demand growth will be 1.5 million barrels per day. In the third quarter of 2023, the economies of the United States and Japan may slow down, but the economies of China and Europe are expected to accelerate, and other emerging economies such as India are expected to benefit from the Fed's monetary easing. Therefore, global crude oil demand is likely to grow. In May, China's crude oil imports fell by 8.7%, dragging down global crude oil demand to a certain extent.
The picture shows global crude oil demand and year-on-year growth rate
Looking forward to the third quarter, the crude oil market will usher in two major benefits: First, the United States will usher in the peak summer travel season, and gasoline consumption will experience a significant seasonal increase. OPEC said it expected jet kerosene and gasoline to be the main demand drivers for the summer tourist season in OECD countries. The second is that the United States purchases crude oil to replenish strategic oil reserves, which will further accelerate the destocking of crude oil in the market. On May 15, the U.S. Department of Energy issued a bidding announcement, announcing that it will purchase 3 million barrels of sour crude oil. The winning bid will be finalized in June, and suppliers will be required to deliver in August. This is the second time the U.S. Department of Energy has replenished SPR after releasing more than 200 million barrels of oil last year.
From the perspective of commercial inventory, destocking will accelerate in the future. In the week of June 7, U.S. commercial crude oil inventories rose slightly by 300,000 barrels to 460 million barrels from the same period in May, and 700,000 barrels lower than the same period last year. We expect that in the absence of large-scale OPEC production cuts, U.S. commercial crude oil may return to around 420 million barrels.
To sum up, in the short term, the global crude oil supply is still in the contraction stage, and the recovery of OPEC production still needs to observe the crude oil market price, and the volume will not increase soon; In the short term, the demand will usher in the peak consumption season of the summer travel season and the replenishment of the US strategic reserve. In the third quarter, China's crude oil demand will accelerate as the economic recovery accelerates. Therefore, crude oil prices will rise in stages in the next 1-3 months. Domestic and foreign investors can use CME group's WTI crude oil weekly options and previous energy crude oil futures to hedge the risk of rising prices or investment opportunities.
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