Crude Oil Weekly Review: As oil prices have narrowed their downward trend, will the United States be forced to expand its tactics? I'm afraid it's a bit difficult

This week, international oil prices closed down for the second consecutive week, but the weekly Candlestick chart has a clear downward lead, showing a fierce long and short see-saw. With demand approaching the pre-epidemic level, OPEC+ oil-producing countries rejected the US call to speed up production, triggering a new round of supply concerns. This increases the prospects for the United States to increase shale oil production and release strategic reserves. In addition, Iran and major powers agreed to resume nuclear negotiations this month, which may lead the United States to lift sanctions on Iranian oil, thereby increasing global supply.

NYMEX crude oil futures closed down 2.46% to US$81.17/barrel; ICE Brent crude oil futures closed down 1.17% to US$82.55/barrel. The two cities both hit new lows since October 7, reaching $78.25/barrel and $80.20/barrel respectively.

OPEC+ does its own way

The Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed at a meeting on Thursday (November 4) that they will continue to implement the plan to increase oil production by another 400,000 barrels per day from December, despite the US call for further oil increases. Supply, cooling rising oil prices.

OPEC’s de facto receiver, Saudi Arabia, said that the oil market is adequately supplied. Earlier, Kuwait expressed support for OPEC+'s current plan to increase global oil supply. The Iraqi side believes that the planned increase in production is sufficient to meet demand and stabilize the market.

Edward Moya, senior market analyst at OANDA, said: "This is a fast-paced OPEC+ industrial policy meeting. OPEC+ has not considered changing its output strategy at all. This is their message."

Iran nuclear talks resumed this month

While Western countries are increasingly worried about Iran’s nuclear development, Iran’s top nuclear negotiator said this week that negotiations to resume the 2015 Iran nuclear agreement will be resumed on November 29. Later statements from the United States and the European Union also confirmed this.

Since June, negotiations have been stalled. The six rounds of talks so far have been conducted indirectly. Mainly European diplomats shuttle between US and Iranian officials because Iran refuses to have direct contact with the United States. Earlier on Wednesday, the secretary of Iran’s Supreme National Security Council stated that unless U.S. President Biden can guarantee that the United States will not abandon the Iran nuclear agreement again, negotiations to restore the agreement will fail.

ING said this week: "In addition to the possibility of oversupply in the market next year, another factor hindering OPEC+'s production increase is the uncertainty of whether and when Iran will resume supply."

Possible U.S. Coping Strategies

① Release reserves

The White House on Thursday (November 4) criticized the decision of major oil-producing countries to maintain stable oil production, saying that OPEC+ seems "unwilling" to use its power to help the global economy recover. The White House spokesperson also said that the Biden administration will consider using its comprehensive tools to enhance the resilience of the energy market.

Since the retail price of gasoline in the United States is close to $4 per gallon, this is considered the limit that American drivers can afford. US President Biden last Saturday (October 30) urged major energy producing countries of the G20 with idle capacity to increase production to ensure a stronger recovery of the global economy, as a pressure on OPEC and its partners to increase oil supply Part of an extensive effort.

Edward Moya, senior analyst at OANDA, said: "The reason why the price of crude oil has fallen... The Biden administration has exhausted all possible appeals to OPEC+ members. World leaders have no cards to put pressure on OPEC+, and only use it. The strategic oil reserve suppresses oil prices."

② Increasing shale oil production

In the past two weeks, oil prices have begun to fall from multi-year highs due to rising US inventories and signs that high oil prices may encourage other places to increase supply. The latest inventory data released by the U.S. Energy Information Administration (EIA) shows that as of the week of October 29, crude oil inventories increased by 3.29 million barrels to 434.1 million barrels. Analysts had previously estimated an increase of 2.25 million barrels.

The decision of US shale oil producers to refuse to increase oil production amid soaring prices this year may be coming to an end. Several large oil companies, including BP, Chevron and ExxonMobil, plan to increase production or shale oil spending next year, which may weaken OPEC+'s efforts to control supply and support oil prices.

BP said this week that it will increase spending on shale oil assets by $500 million next year. The CEO of Exxon Mobil said last week that the company increased shale oil production by 30% to about 500,000 barrels per day in the last quarter and may add two more drilling rigs in the future. Chevron will add two drilling rigs and complete completion staff this quarter, and increase production in early 2021.

Josh Young, chief investment officer of energy investment agency Bison Interests, said: “As oil prices rise, it is more and more likely that oil production will resume growth.” However, he said that investment income will still be lower than the growth rate before the new crown epidemic.

Matthew Sherwood, a global economist at the Economist Intelligence Unit (EIU), said: "The main factors affecting oil prices will continue to be related to energy tensions in Europe and the shift from natural gas to oil derivatives." However, Sherwood said that this situation may change from The relief will begin in the middle of 2022, as the United States will respond by increasing oil production.

Demand continues to be in short supply

The State Administration of Grain and Material Reserves of China stated last Sunday (October 31) that it has recently carried out annual national reserve product oil rotation work. The gasoline and diesel out of the warehouse in this rotation will be used to increase market resources and ease supply tensions.

With the reopening of enterprises and the resumption of domestic road and air travel, U.S. oil consumption has returned to pre-pandemic levels, but production and refining have lagged, and the rate of crude oil processing at refineries has been about 5% lower than before the pandemic. Inventory brings downward pressure.

As of last weekend, US gasoline inventories were 5 million barrels lower than the pre-pandemic seasonal average, while distillate inventories were 6 million barrels lower. U.S. domestic crude oil production is also well below pre-pandemic levels, which has led to a greater decline in crude oil inventories. Last week, commercial crude oil inventories were 18 million barrels (4%) lower than the pre-pandemic average. The shortage in the Cushing delivery site was the worst, where inventories fell by 25 million barrels (48%).

The sharp drop in inventory means that unless OPEC+ is persuaded to speed up production, there are few shock absorbers to deal with any unexpected output interruption or stronger-than-expected consumption growth. Some energy traders speculate that the US move may involve the release of strategic oil reserves, which is not so good for the Biden administration.

Bob Yawger, head of energy futures at Mizuho, said OPEC+ has decided to maintain a steady increase in production. If the Biden administration lacks a substantive response, oil price increases will continue. He added that only with the participation of China and other countries can the oil shortage in the market be resolved.