Crude Oil Prices Stop Rising & Enter Cyclical Adjustment with Changes in Supply

Transcription

1 Analyst: SUI Xiaoying License No.: F Z Crude Oil Prices Stop Rising & Enter Cyclical Adjustment with Changes in Supply 2018 Market Review and 2019 Market Outlook SUI Xiaoying, Research Institute of Founder CIFCO Futures Content Chapter I. Review of Market Performance... 3 I. Historical Market Performance of Crude Oil... 3 II Market Performance of Crude Oil... 4 Chapter II. Macroenvironment... 6 I. Global Economy Slows Down, Economic Outlook Diverges between Developed & Emerging Economies... 6 II. USD to End Bullish Cycle in 2019, Correlation with Crude Oil Remains Weak... 7 III. US Stock Market Very Likely to Enter Correction in 2019, Oil Price to be Affected... 8 Chapter III. Crude Oil Supply... 9 I. Global Crude Oil Supply to shift from Over-supply to Balance... 9 II. OPEC Has Less Say in Oil Market III. Non-OPEC Oil-Producing Countries Leading Global Supply of Crude Oil IV. Shale Oil Industry in North America Keeps Booming Chapter IV. Crude Oil Demand I. Economy Slows Down, Global Demand for Crude Oil Remains Gloomy II. US Economy Slows Down, Demand For Crude Oil Weakens III. China Import of Crude Oil Remains Strong, Demand for Petroleum, Diesel Weakens IV. India Petroleum Consumption Remains High under Booming Economy Chapter V. Supply & Demand Report Chapter VI. Geopolitics I. US Holds the Cards on Iran Sanctions II. US Intervenes OPEC Petroleum Supply by Stressing on Saudi Arabia III. US Impedes Russia through Low Oil Price Chapter VII. Fund Positions Chapter VIII. Technical Analysis Chapter IX. Market Outlook & Futures Trading Advice

2 Summary: 1. Global economy is to slow down and risk assets will be under pressure. China economy will encounter headwinds. The economy in Europe and Japan will turn into sluggish. With the declining impact of fiscal stimulus policy and the tightening of monetary policy, US will also slow its economic growth. Meanwhile, the trade frictions among major economic powers also lead to the economic downturn under which risk assets will be under pressure. 2. The supply of crude oil depends more on political trends. US, Saudi Arabia and Russia become three key players in the field. Radical change occurs in the supply of crude oil around the world with US, Saudi Arabia and Russia becoming the top three powers of oil-producing countries, controlling over a third of crude oil supply around the world. Meanwhile, with the soaring up of shale oil output in US and its increasing political influence in the Middle East, OPEC become less weighted in oil market. The supply of crude oil depends more on political factors. 3. The weakening demand is the root cause for the declining price of crude oil and other commodities in the long run. As the global economy encounters headwinds, the demand for commodities are not as expected. As major oil consuming countries, the economy of China and US is very likely to continue to go weak and support can hardly be found from the demand side. At the same time, we believe that the root cause for declining price of crude oil and other commodities likes in the collapse of support from the demand side resulting from the weakening economy. 4. Geopolitics plays an ever bigger role in the crude oil market. The political game among US, Russia, the Middle East and oil-producing countries in OPEC is the fundamental reason leading to sharp fluctuations of oil price. The politics and strategies regarding petroleum among these countries will continue to influence the supply side of crude oil in the near future, which will cause sharp price fluctuations around the world. 5. In 2019, the agreement on reducing crude oil production among OPEC+ will ease the over-supply of crude oil and Founder holds that the bull cycle starting from early 2016 of crude oil is close to an end. In 2019, the price of crude oil is to under adjustment and to go down in average. During the last quarter in 2018, the oil price plummeted and was about to approach the lowest level by the end of The price of Brent crude oil is estimated to form a bottom from 50USD to 55USD. The price of WTI crude oil is estimated to form a bottom from 45USD to 50USD. The price of SC crude oil is estimated to form a bottom at around 400CNY. In 2019, the average price of Brent crude oil is estimated to be around 69USD per barrel. The average price of WTI crude oil is estimated to be around 60USD per barrel. The average price of SC crude oil is estimated to be around 500CNY per barrel. The highest price in 2019 is very unlikely to surpass last year. 2

3 Chapter I. Review of Market Performance I. Historical Market Performance of Crude Oil Chart 1-1:Historical Price of Global Crude Oil Source: BP Compiled by Research Institute of Founder CIFCO Futures Phase I.( ):The production and demand of petroleum was controlled by western countries. The price was within a low range of 1.5USD to 1.8USD per barrel. In September 1960, OPEC was established and began to bargain with multinational corporations from western countries regarding the production rights and pricing rights of petroleum despite the fact that OPEC had little say in it. From 1970 to 1973, OPEC won in a series of negotiations and the pricing rights of petroleum began to shift and the global petroleum price started to rise. Phase II. ( ):The fourth Middle East war broke out in October 1973 and OPEC declared petroleum embargo which led to soaring up of petroleum price. The price went up from 3USD per barrel to 13USD per barrel and caused the first petroleum crisis. Meanwhile, the international status of OPEC had grown rapidly and the price stabilized within the range of 10 to 12USD per barrel. Phase III. ( ):Political turmoil broke out in Iran in the end of 1978 and followed by the Iran-Iraq War. The output of petroleum from Iran plummeted from 5.80 million barrels per day to less than 1 million barrels per day, the fragile balance of global supply and demand of petroleum existed no more. With the sharp drop of output, 5.60 million barrels of petroleum shortage gap emerged every day and the oil price began to soar up from 13USD per barrel 3

4 in 1979 to 34USD per barrel in 1981 and caused the second petroleum crisis. Phase IV. ( ):The global oil price plummeted to less than 10USD per barrel in 1986 which led to crisis among global petroleum market as well as heavy clashes on world economy and financial systems. The third petroleum crisis broke out and the Middle East has almost lost all petroleum rights. Western countries regained the power of initiative in the global battle for rights and the pricing rights of crude oil had shifted from sheer OPEC to the consideration which consisted of OPEC, the demand for petroleum and global petroleum capital. The global oil basically achieved the market-based pricing. Phase V. ( ): The Iraq War broke out and the oil price topped 40USD per barrel. Meanwhile, the global economy, especially the emerging economies, entered into a new era of economic growth. The petroleum market remained in tight balance and the oil price kept rising. Till the mid-year of 2008, the global oil price hit a record high at 149USD per barrel. Phase VI. ( ):The global financial crisis broke out. The global oil price plummeted from over 140USD per barrel to 40USD per barrel within less than half a year. Later, many countries implemented stimulus policies with an unprecedented scale which brought market liquidity and global economy back to normal and the oil price, for the second time, mounted up above 100USD per barrel. Phase VII. (2014 to date):the global crude oil witnessed over-supply and the global oil price plummeted during the mid-year of The oil price went down from over 100USD per barrel to around 29USD per barrel in early Later, the oil-producing countries started a new round of reducing crude oil output and the supply and demand gradually turned into balance. Besides, as geopolitical issues frequently occurred, the average oil price kept rising. II Market Performance of Crude Oil Since early 2018, with oil-producing countries reducing crude oil output and geopolitical tensions, the global oil price saw a rapid growth. The price of Europe and US crude oil futures went up from over 60USD up to about 76USD and 85USD respectively, with an increase by around 40% within the year. Meanwhile, as the output of shale oil in North America kept rising and the maximum limit for transportation, the price of US crude oil kept weakening compared with that of Brent crude oil. The spread between Brent and WTI crude oil has once increased to 11USD, a record high over the last four years. In the last quarter, since US sanctions on Iran was not as expected, and major oil-producing countries such as Saudi Arabia and Russia actively increased their output, worries on possible over-supply prevailed and the oil price plummeted to the lowest level throughout the year. China s Crude Oil futures was officially listed on March 26 th, Its price has remained fluctuated and has gone up with a peak of 598CNY per barrel before October. Later, with the price of crude oil futures in foreign markets plummeted, the price of crude oil futures in China plummeted to the lowest level throughout the year. SC Crude Oil has remained highly correlated with the oil price around the world, the correlation between SC Crude Oil and Brent Crude Oil is above 0.6. Meanwhile, with the continued depreciation of RMB, SC Crude Oil remained stronger than that in foreign markets, with the price of SC Crude Oil 6USD more expensive than that of Brent per barrel. The spread between Brent and SC fluctuated between -10 to 6USD. SC Crude Oil remains correlated with furnace oil, pitch and PTA. The trade volume continued to go up since SC Crude Oil got listed in China and the trade volume soared up when 4

5 market maker system was introduced. By the end of November, daily trade volume surpassed 500,000 lots with positions holding reaching 67,000 lots. Chart 1-2:Price Outlook of Three Marker Crude Oil Chart 1-3:Spread & Price Outlook of WTI & Brent Chart 1-4:SC Crude Oil Price Outlook Chart 1-5:Spread & Price Outlook of SC & Brent 5

6 Chapter II. Macroenvironment I. Global Economy Slows Down, Economic Outlook Diverges between Developed & Emerging Economies Table 1: GDP & Predicted Value of World & Major Economies Source:Bloomberg (Compiled by Founder CIFCO) World economy witnessed a stable growth in US achieved a relatively high economic growth rate, the unemployment rate kept falling and the signal of inflation appeared. The Federal Reserve had increased interest rates for three times and was estimated to increase for another round in December. There might be a third or fourth increase in US economy is estimated to slow down. So would European economy be. Economic outlook diverged among emerging economies. China s economy continued to encounter headwinds but was on a transition to achieve quality development. India s economic rate witnessed a slight increase. Considering world economy in 2018, America s trade protectionism has caused certain influence on future economy. Though global economy kept a stable growth this year, the outlook among developed and emerging economies would continue to diverge in the next two years. Economy in developed countries might be in sluggish and most developing countries would achieve rapid GDP growth. Global economy would decline. CRB index which features macroeconomy and global commodities also had a U-turn in 2018 and commodities such as crude oil entered technical bearish market. Chart 2-1: GDP & Predicted Value of World & Major Economies 6

7 II. USD to End Bullish Cycle in 2019, Correlation with Crude Oil Remains Weak Most international crude oil trade is still denominated in US dollar and in theory, crude oil price is rather negative correlated with US dollar. However, over the past year, US dollar has remained consistent with the performance of crude oil and has shown weak positive correlation. America has increased its interest rates for eight times since 2015 and there might be another three or four times coming up in Meanwhile, US economy remains strong as a whole and the yield of US Treasury Securities has been on the rise and the tax relief policy also makes it possible for more US dollars to return to America. The economy in Europe and other emerging economies goes weak and most non-us dollar are in depreciation which also boosts US dollar. During the trade war, China s trade surplus decreased and the exchange rate of RMB kept going weak. Besides, the fact that US restarted its sanctions on Iran and the tension between US and Russia also led to risk aversions on the market and US dollar got support. By the end of 2018, US dollar index increased by almost 10% within the year. However, when it comes to 2019, our views might change because the elements supporting US dollar going strong would change. Firstly, the marginal effect of tax relief policy on economic stimulus would decline. The interest-rate rise cycle would come to close by the end of 2019 and global capital might flow out of America. Besides, the fact that the Democratic Party regained its control over House of Representatives during mid-term election would also balance and check the power of Trump administration. The game between the Democratic Party and the Republican Party is not conducive to the performance of US dollar. Therefore, we think that US dollar might go weak during the second half of Though US dollar and crude oil is less correlated, the negative correlation would remain in the long run. Chart 2-2:Comparisons between US Dollar Index & WTI 7

8 III. US Stock Market Very Likely to Enter Correction in 2019, Oil Price to be Affected In theory, if the States and global economy goes well, the price of crude oil and American stock market would go up. When the risk appetite increases, risk assets featured with crude oil and American stock market would also go up. The former one reflects the commodity nature of crude oil and the latter one indicates the financial nature of crude oil. Therefore, in theory, crude oil and US stock market have relatively positive correlation. According to our statistics, the correlation between WTI crude oil and US S&P 500 Index reached above 0.8 over the past three years. The correlation is around 0.7 in In a relatively long period, these two remains highly correlated, so we could predict the oil price by looking at the US stock market as a reference. The interest-rate rise cycle of US would close to an end, and the capital might flow out of US market. Meanwhile, the marginal effect by economic stimulus policies would diminish. US economy would be very likely to go weak. US stock market plummeted in October, 2018 and would be very likely to remain this way in 2019, which would drag down the crude price and this would also be a proof of our predictions on the price trend of crude oil. Chart 2-3:Comparisons between US S&P 500 Index & WTI 8

9 Chapter III. Crude Oil Supply I. Global Crude Oil Supply to Shift from Over-supply to Balance During the second half of 2018, Saudi Arabia, Russia and America kept increasing their crude oil output, the global crude oil supply shifted from under-supply to over-supply. According to latest predictions of EIA, the global crude oil supply would increase by 2.38 million barrels per day in The global crude oil supply increased by less than 1 million barrels per day in It is estimated that the global crude oil supply would increase by 2.05 million barrels per day in In the past two years, the growth of global crude oil output was contributed mostly by non-opec countries, especially America which increased its crude oil output by 2.06 million barrels per day in 2018 and will increase the output by 1.69 million barrels per day in 2019 according to statistics from OPEC, accounting for over 80% of all the output growth around the world. From early 2017 and mid-year of 2018, oil-producing countries kept reducing their crude oil output which improved the supply and balance situation of global crude oil. The oil price mounted up to a high level over the past four years. US shale oil companies which made great profits from it also further increased their output and became the main contributor to the growth of global crude oil supply. However, the US restarted its sanctions on Iran and altered the situation of global supply of crude oil. In order to make up for the possible shortage supply gap, Saudi Arabia, Russia, Iraq and other oil-producing countries increased their output instead of reducing their output from early Saudi Arabia has successfully increased its daily output by 700,000 barrels within few months. Russia increased its daily output by 300,000 barrels. Besides, with the soaring up of shale oil output in North America, the global crude oil shifted from under-supply to over-supply. The reduction agreement of crude oil reached by OPEC+ by the end of 2018 would lead the over-supply of crude oil to balance. However, we shouldn t neglect the fact that the States has been increasing its crude oil output. Besides, with US s increasing pipeline capacity, more crude oil would be available in the global market. Chart 3-1:OPEC & Global Crude Oil Supply Source:OPEC Compiled by Founder CIFCO Chart 3-2:Changes in Global Crude Oil Output Source:EIA Compiled by Founder CIFCO 9

10 II. OPEC Has Less Say in Oil Market As the organization of petroleum exporting countries, OPEC accounts for a third of world petroleum output. The changes of policy on its output will have significant influence on the oil market. By the end of 2018, in order to deal with low oil price, OPEC and non-opec oil-producing countries announced to reduce the output by 1.20 million barrels per day, with OPEC reduced by 800,000 barrels per day and non-opec reduced by 400,000 barrels per day. The policy would be implemented in January 2019 with a period of six months. Since the crude oil is over-supplied, this policy would ease the pressure of the market, however, the actual implementation should also be focused on. Though OPEC would implement the reduction policy, signals have shown that the output policy of OPEC is more and more influenced by external factors, and it has less say in oil market. Saudi Arabia, the largest oil-producing country in OPEC encountered many interventions from United States. Besides, America s sanctions on Iran and Venezuela caused these two countries severe damage in terms of oil output and export volume, which adds uncertainty to the petroleum supply from OPEC. With the increasing output of crude oil from America and its continuous political intervention towards OPEC, OPEC has less say and finds it rather difficult to make adjustment to its output. We hold the opinion that with the over-supply of global crude oil, OPEC is more inclined to reduce output though it is not conducive to America s interest. Whether to increase or decrease the output would become the focus of the play between America and OPEC in future. Chart 3-3:Crude Oil Output Among OPEC Members Chart 3-4:OPEC Surplus Capacity & Price Outlook 10

11 Chart 3-5:OPEC Crude Oil Output Chart 3-6:Saudi Arabia Crude Oil Output Chart 3-7:Iraq Crude Oil Output Chart 3-8:Venezuela Crude Oil Output III. Non-OPEC Oil-Producing Countries Leading Global Supply of Crude Oil Over the past two years, the increase of global supply of crude oil is contributed to non-opec countries with shale oil produced by North America accounting for 80% to 90%. Besides, as the largest non-opec oil-producing country, Russia hit a record high in terms of its output in the second half of According to the latest predictions of OPEC, non-opec supply of crude oil would increase by 2.31 million barrels per day in 2018 and increase by 2.23 million barrels per day in Besides America, Canada and Russia also contribute to the growth of crude oil supply in United States and Russia are major non-opec oil-producing countries. Unlike OPEC oil-producing countries, America and Russia are less intervened by political reasons when it comes to their output. America has produced much shale oil. Due to the relatively high cost, the output of shale oil is easily affected by oil price. The export of petroleum and natural gas accounts for 50% among its estimated federal budget revenue, therefore Russia s willing to keep their output at a rather high level. We could also see that the output basically falls within a relatively stable range over the past years. 11

12 Chart 3-9:Non-OPEC Oil Supply & Outlook Source:IEA Compiled by Founder CIFCO Chart 3-10:Non-OPEC Increase in Oil Supply & Outlook Source:IEA Compiled by Founder CIFCO Chart 3-11:2018 Output Fluctuations in Non-OPEC Countries Chart 3-12:2019 Output Fluctuations in Non-OPEC Countries Source:OPEC Compiled by Founder CIFCO Source:OPEC Compiled by Founder CIFCO Chart 3-13:Russia Crude Oil Output Chart 3-14:Canada Crude Oil Output 12

13 IV. Shale Oil Industry in North America Keeps Booming Just after the downturn in 2016, the shale oil industry in US and Canada has boomed again during 2017 and 2018 thanks to the rising oil price and Trump administration s advocation on energy exploitation, and has now surpassed the peak in 2015 in terms of its output. With OPEC kept reducing its crude oil output, the shale oil industry in North America kept booming as the oil price continues to rise and the profit margins widened. US rig count hit a record high in 2018 and statistics of November 2018 have shown that the output of shale oil in US reached a record high of 7.80 million barrels per day and investment activities are as active as During 2013 to 2016, the output of single well plummeted and the efficiency of single well has been on the rise over the past two years. Besides, the continuous rising of well drilling and well completion contribute to the increase of the current output. Besides, the fact that inventory well also increased and hit a record high indicated that the future growth of crude oil also has strong support. EIA predicted that the output of US crude oil would reach million barrels per day in 2018 and would reach up to million barrels per day in However, if a market segmentation is conducted among the seven largest shale oil production areas in US, Permian witnessed a sharp increase of shale oil output while Bakken and Eagle Ford witnessed limited increase over the past few months. The output of these three producing areas accounts for 80% of all shale oil output in US, therefore, the output situation of these three areas could basically reflect the situation of shale oil in US. The well drilling, well completion and inventory well in Permian all kept increasing. However, the well drilling and inventory well grows faster than well completion. This indicated that with mounting pressure of inventory well, well completion slows its pace while investment activities remain active in the upstream so there s still great potential of the output in Permian. Likewise, the well drilling, well completion and inventory well kept increasing in Eagle Ford. However, the well drilling and well completion grew slower than inventory well. This indicated that the investment activities in the upstream slowed down and the output efficiency dropped. However, the rapid growth of inventory well indicated there s still potential to increase output in future. Well drilling, inventory well dropped in Bakken and the increase of well completion supported the output of shale oil in the area. However, the drop of well drilling and inventory well indicated investment activities turned into sluggish in the upstream. Chart 3-15:US Crude Oil Output & Drill Numbers Chart 3-16:US Crude Oil Output 13

14 Chart 3-17:US Crude Oil Export Volume Chart 3-18:US Shale Oil Output & Drill Numbers Chart 3-19:US Top 7 Largest Shale Oil Producing Areas Chart 3-20:Permian Basin Chart 3-21:Bakken Chart 3-22:Eagle Ford 14

15 Chapter IV. Crude Oil Demand I. Economy Slows Down, Global Demand for Crude Oil Remains Gloomy Chart 4-1:Distribution of Global Petroleum Consumption Source:EIA Compiled by Founder CIFCO The demand for crude oil is highly correlated with global economic trend. Developed countries showed strong economic performance in 2018 yet emerging countries diverged in their economic performance. However, since America has gradually eased up its economic stimulus policy and frictions continue growing in global trade, it is hard to predict that the global economy would remain optimistic in America and other developed countries might encounter economic downturn, and emerging countries like China would also encounter economic headwinds which is negative to the demand for crude oil. According to the latest predictions by EIA, the demand for crude oil around the world would increase by 1.52 million barrels per day in 2018 and would increase by 1.44 million barrels per day in The predictions by IEA seems relatively pessimistic and the demand would increase by 1.30 million barrels per day in 2018 and would increase by 1.40 million barrels per day in The increase of global crude oil demand in 2018 mainly comes from Asia, including emerging developing countries such as China and India. The situation would remain in Though America s demand for crude oil accounts for around 20% in the world, there s limited room for its increase. In 2019, US economy is very likely to slow down its economic pace and so would its demand for crude oil be. Besides, more attentions need to be paid to the fact that the development of new energy is gradually replacing traditional energy in the long run, though the demand for traditional energy wouldn t be threatened within short period of time. 15

16 Chart 4-2:Source of Growth in Global Petroleum Consumption Source:EIA Compiled by Founder CIFCO Chart 4-3:Distribution of Global Crude Oil Consumption Source:BP Compiled by Founder CIFCO II. US Economy Slows Down, Demand For Crude Oil Weakens America is the largest crude oil consuming country in the world, accounting for around 20% of the world consumption. However, since America kept relatively low economic growth pace, and the demand for petroleum slowed down, the continuous going down of US economy in 2019 would curb the increasing demand for energy. According to the latest statistics of IEA, the US crude oil would increase by 400,000 barrels per day in 2018 and would slow down and increase by 200,000 barrels per day in The demand for crude oil from refinery plant is direct demand. The operating rate of US refinery plant and crude oil processing volume reached the historical high level and there s more direct demand. The operating rate reached up to around 98% during the consumption season. In terms of the downstream demand, the consumption of diesel and distillate fuel oil outperformed petroleum consumption. The US petroleum inventory in 2018 was at a historical high level and far higher than the average level of the past five years while the distillate oil inventory was at a lower level compared with the average level of the past five years. During destocking cycle, US crude oil inventory was basically at the level of five-year average line in 2018 and showed the trend to go up by the end of Considering the over-supply around the world, the continuous increasing of US petroleum output and less optimistic outlook of future US consumption, etc., it is estimated that US crude oil inventory would continue to go up in 2019 and the export volume of US crude oil is expected to keep growing. 16

17 Chart 4-4:Operating Rate of Refinery Plant Source:Bloomberg, Compiled by Founder CIFCO Chart 4-5:Crude Oil Processing Volume Chart 4-6:US Crude Oil Inventory Chart 4-7:US Gasoline Inventory Chart 4-8:US Distillate Inventory Chart 4-9:US Cushing Crude Oil Inventory 17

18 III. China Import of Crude Oil Remains Strong, Demand for Petroleum, Diesel Weakens As the second largest crude oil consuming country in the world, China s demand for crude oil has always remained strong. During January to October in 2018, the apparent volume of crude oil consumption of China totaled over 530 million tons, a year-on-year increase of 5%. During the first ten months in 2018, China has imported 377 million tons of crude oil, a year-on-year increase of 8%, and foreign-trade dependence reached 70%. Though China s economy encounters headwinds and the demand for energy is somehow curbed, China s import of crude oil remains strong. One important reason is that some non-state-owned refineries and traders have been granted crude oil import quotas over the past two years. The crude oil import quota allowance in China reached million tons in 2018 and would surpass 200 million tons in 2019, which means that the import volume of petroleum in China during 2018 and 2019 will make new breakthroughs. However, compared with the strong demand for crude oil, the refined oil market in China is far from satisfactory. The apparent volume of refined oil (gasoline, diesel, kerosene) consumption reached 320 million tons in 2017 and the volume reached 240 million tons during the first nine months in 2018, an increase of 0.6%. The demand for kerosene increased as aircraft industry witnessed rapid development, however, the kerosene consumption doesn t account much in refined oil consumption. The consumption of gasoline and diesel, which accounts much in refined oil consumption, was stuck into stagnation. Data has shown that the average growth rate of gasoline consumption was as high as 9.5% during 2010 to However, the gasoline consumption saw a year-on-year increase of 2.8% in The gasoline consumption in the first nine months in 2018 saw a year-on-year increase of 3% which was a sharp drop. The diesel consumption in 2017 saw a year-on-year increase of 2.4% while it saw a negative increase during the first nine months in The declining consumption of diesel was, on the one hand, caused by the slowing down of the usage of passenger vehicles. On the other hand, the rapid development of new energy vehicles and bike-sharing somehow curb the consumption of fuel vehicle and fuel oil. The gloomy domestic economy can also have a negative influence on consumption. Main consumption fields of diesel are industry and logistics industry and the weakening economy are the main reasons for the stagnation of diesel consumption. Chart 4-10:Consumption of China Oil Products Chart 4-11:Consumption of China Gasoline 18

19 Chart 4-12:Consumption of China Diesel Chart 4-13:Consumption of China Kerosene Chart 4-14:China Car Parc & Gasoline Consumption Chart 4-15:China Monthly Import Volume of Crude Oil Chart 4-16:China Export Volume of Oil Products Chart 4-17:China Import Volume of Oil Products 19

20 IV. India Petroleum Consumption Remains High under Booming Economy India is the third largest petroleum consuming country in the world following US and China. Thanks to high economic pace and automobile consumption, the consumption of petroleum in India has been on the rise over the past years. Meanwhile, India s consumption of petroleum contributed to around 15% of global petroleum consumption. According to predictions, the demand for crude oil in India would maintain the growth rate of about 5% during 2018 to India has a promising economic outlook. Its population has been increasing and so is its resident s income and consumption demand. The number of trucks, automobile and motorcycle has soared up and the demand for fuel oil also has gone up. 80% of crude oil demand relies on import. Though India has a population of 1.3 billion, the consumption of petroleum in India per capita falls far behind other emerging big powers which means that the potential for its demand for crude oil remains unlimited in future. The demand for petroleum in India would keep a high growth rate in future. Firstly, India s economy would keep a high growth rate. It is estimated that India would be the fastest growing country among emerging economies. This would boost the rapid growth of petroleum consumption. Secondly, in order to meet the demand, refinery capacity would witness a rapid expansion. According to the oil minister in India, India would double its refinery capacity in future. BP estimated that by 2030, India would surpass China and become the largest energy consumption market in the world. Chart 4-18:Petroleum Products Demand from India Source:IEA Compiled by Founder CIFCO Chart 4-19:Gasoline & Diesel Demand from India Source:IEA Compiled by Founder CIFCO 20

21 Chapter V. Supply & Demand Report Table 2:Crude Oil Supply & Demand Report Source:EIA, Compiled by Founder CIFCO According to EIA predictions, the total global demand for crude oil would be million barrels per day and the total global supply would be million barrels per day with 200,000 barrels per day of over-supply. The global crude oil market in 2018 would basically be in balance and the supply might surpass the demand in 2019 with 630,000 barrels per day. Chart 5-1:Supply & Demand in Global Crude Oil Market Source:EIA Compiled by Founder CIFCO Besides, regional changes in inventory could also reflect the supply and demand status. The two crude oil inventroy data with great market influence are EIA US crude oil inventory and OECD crude oil inventory. Right now, both US and OECD show that the petroleum inventory is increasing and is very likely to remain this way for a period of time. The cycle of destocking of US crude oil began in the second quarter of The whole US market has been destocking throughout 2017 and the market slows its pace of destocking in 2018 and during the fourth quarter of 2018, the US market began to increase its inventory. Meanwhile, as can be seen, that US gasoline inventory was at a historical high level and has remained this way for the past few months. However, the distillate feul oil inventory was at around five-year average line. It can be seen that the spread of several cracked gasoline keep going weak yet the 21

22 spread of cracked diesel keep soaring up and mounts up to a high level over the past years. Structural over-supply of gasoline has shown in the market and this appeared not only in US, but also in major economies such as Euopre, China and Sinapore. Chart 5-2:OECD Commercial Oil Inventory Source:IEA Compiled by Founder CIFCO Chart 5-3:OECD Commercial Oil Inventory Compared with Five-year Average Source:IEA Compiled by Founder CIFCO The cycle of OECD destocking of petroleum is synchoronized with the cycle of US destocking, however, OECD increased the inventory at mid-year of 2018 and ended in September OECD national commercial petroleum inventory reached billion barrels per day, a new high over the past nine months. However, OECD inventory was below five-year average line starting from this March and is likely to break through the five-year average line after continuous increasing of inventory in the next half of the year. 22

23 Chapter VI. Geopolitics With the rapid development of US shale oil industry over the past two years, the supply of global petroleum witnessed radical changes. With America s increasing crude oil output and its expanding political influence in the Middle East, it gradually has more say in the market of crude oil. The output of crude oil in US was at the similar level with Saudi Arabia and Russia in 2018 and the supply side of crude oil was gradually dominated by US, Saudi Arabia and Russia. OPEC has less say in petroleum market and the largest OPEC oil-producing country, Saudi Arabia, is restricted by US. Besides, Iran and Venezuela are under sanctions from US. The policy on output of crude oil within OPEC is more and more influenced by external factors and its influence declines. Over the past two years, the ministerial meetings of OPEC have been gradually replaced by the Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC) which consists of both OPEC and non-opec members. Though US is not involved, its changes in crude oil output and its political interventions could also shift the output policy to be made by oil-producing countries. Over the past years, America has not only increased its crude oil output, but also shifted the crude oil price by its political influence, and it has increased its influence on crude oil market. From the game among US, Saudi Arabia and Russia, the three powers in petroleum market, we can dig into the underlying reasons of storming oil market. America has always been proactive, such as putting pressure on Saudi Arabia, imposing sanctions on Russia and Iran. All these are of its own strategic concern. Firstly, to balance its allies and enemies through various ways. Secondly, to maintain its economic and political appeal, i.e., to prevent the oil price from soaring up. Thirdly, to promote the export of shale oil in order to ease the structure surplus since the output of shale oil keeps going up. Fourthly, to drag down some countries economy by curbing the oil price in order to consolidate the hegemony of US dollar. Whatever its aims are, the game among US and major oil-producing countries can have far-reaching influence on the oil market. I. US Holds the Cards on Iran Sanctions America s sanctions on Iran took effect on November 5th, 2018 with the purpose to completely shut down Iran s oil export. However, eight countries, including China, India, Greece and Japan were temporarily exempt. while being the main countries importing Iranian s oil, six of which imports over 90% of crude oil from Iran. This has reduced the effect of sanctions. The oil price falls to the level before it started to rise early due to sanctions on Iran. America might impose sanctions in order to prevent the oil price from soaring up. On the one hand, America would like to balance Iran. On the other hand, America would like to ease the impact on oil market due to the sanction, since the market would have a huge shortage gap of supply if other countries stop purchasing Iranian crude oil. As one of the world s five largest oil-producing countries, Iran s output has always been at a high level and is a major supplier for Asia. Statistics from EIA have shown that the export volume of Iranian crude oil reached 2.50 million barrels per day in 2017 and it mainly exported the crude oil to China (24%), India (18%), South Korea (14%), Turkey (9%), Italy (7%), France (5%), Japan (5%), UAE (5%) and other countries (13%). As an export-oriented economy, the export of petroleum is critical to its economy. The output of crude oil accounts for over a quarter of Iranian GDP and the output value of refinery of petroleum and other correlative industries is excluded. Official statistics have shown that Iranian crude oil output reduced to million barrels per day in October, decreased by 500,000 barrels per day compared with May. Before America imposed sanctions on Iran on May, the export volume of Iranian crude oil was around 2.50 million barrels per day, though export data vary great deal in the past few months among different institutions. In fact, the actual export volume has always remained to be a mystery. 23

24 The reason is that petroleum is the lifeline of Iran and most financial revenue comes from petroleum export, therefore, Iran would try its best to exclude the export volume when it is imposed sanctions by America. On the one hand, Iran has allowed private-owned refinery enterprises to sell Iranian petroleum and expand the existing transportation routes to secure the petroleum transportation. State-owned shipping enterprises also expand its existing shipping fleet to secure the petroleum maritime transport. On the other hand, Iran has already established new payment system with buyers including EU, China and Russia. Other countries could import Iranian petroleum without having to pay in US dollar which could avoid the settlement of US dollar. Besides, Iran could first ship its petroleum to other countries and resell it. Meanwhile, Iran could also shut down its ship tracking system so the export volume of Iranian crude oil could not be traced. Therefore, Iranian crude oil could still be exported when facing sanctions from US. This means even US impose more strict sanctions on Iran later, the actual impact on the export volume might not as severe as expected. Regarding the purpose of America s sanctions on Iran, we hold the opinion that first, Iran and US have remained hostile for long. During Obama administration, western countries headed by US reached nuclear deals with Iran. However, Trump administration got tough on Iran and tried to balance Iran, its political enemy, by restarting the sanctions. Second, with the soaring up of the shale oil output, the export of US crude oil soared up and US needs a portion of market share. Though the real impact of the sanctions is far below expectations, and eight countries were exempt to ease the impact on the oil market, America is still the one who controls the initiative. In future, whether to impose more strict sanctions or ease the sanctions are all decided by Trump. No matter what decision Trump made, there would be certain impact when implemented on appropriate time, and this would remain to be the timebomb in the crude oil market in future. Chart 6-1:Iran Crude Oil Output Chart 6-2:Iran Crude Oil Export 24

25 Chart 6-3:Export Distribution of Iran Crude Oil Source:EIA Compiled by Founder CIFCO Chart 6-4:Major Export Destination of Iran Crude Oil & Daily Export Volume II. US Intervenes OPEC Petroleum Supply by Stressing on Saudi Arabia The death of Saudi Arabia journalist Khashoggi has caught world attention on the relations between US and Saudi Arabia. Though Europe and other countries condemned and threatened to impose sanctions on Saudi Arabia, the bilateral relations between US and Saudi Arabia remained ambiguous. Later, Trump has declared to consolidate its relations with Saudi Arabia on many occasions since US and Saudi Arabia are allies. For a long time, US and Saudi Arabia has numerous bound interests, which is also the main reason for them remaining allies. First, America hopes to consolidate the hegemony of oil dollar. Since the collapse of the Bretton Woods system, America has been using US dollar as settlement currency to consolidate its world hegemony. Nowadays, US dollar is not very likely to continue to remain as hegemony, and Russia, Iran, Venezuela, Turkey and other countries are speeding up dedollarization by signing currency swap agreement or seeking alternative to US dollar to avoid the control of US dollar. All these have forced America to stay allies with Saudi Arabia, Kuwait and other oil export countries in the Middle East. Saudi Arabia is the largest petroleum supplier country in the Middle East and it would be not a good idea to lose this ally for America. In addition, America must get support from its allies if it wants to expand its influence in the Middle East. Saudi Arabia s weight in the Middle East is crucial to America. As Saudi Arabia is led by Sunnite, America focused on striking Shiite centered on Iran. To stabilize or to take advantage of Sunnite is the prerequisite if America wants to secure its geopolitical interest in the Middle East. Last, Saudi Arabia relies on the arms sales from America and its protection. As one of America s largest buyers, Saudi Arabia has never ceased its cooperation with US in petroleum and arms trade. As Saudi Arabia is seeking protections from US, it cannot challenge the bottom line of US and has concerns for US. Overall, US would continue to be allies with Saudi Arabia in future and Saudi Arabia would continue to assist US in its expansion in the Middle East and strategic deployment in the oil market. With assistance from Saudi Arabia, America would be more flexible in implementing its strategy in the oil market and Saudi Arabia s dependence on America would bring the two countries closer. In terms of oil price, US is unwilling to see too much rise under its economic and strategic considerations, while 25

26 Saudi Arabia prefers high price with its fiscal revenue in mind. For America, first, high oil price is not good for America s economy. Though high oil price is conducive to the development of shale oil industry, petroleum industry only accounts for small portion of America s huge real economy. The manufacturing and industry which accounts for larger portion of real economy, rely more on reasonable oil price, or the high oil price would lead to high cost and threaten the growing of US economy. Secondly, high oil price is not conducive to attract more US dollar back to US and boost US economy. Since global crude oil trade is settled in US dollar, the rising oil price would force other countries to stock more US dollar which prevents US dollar from returning to US. Thirdly, high oil price is not conducive to America s consolidation on the Middle East. The reason is that America s allies in the Middle East such as Saudi Arabia and America s main opponents such as Russia, Iran, Iraq all rely heavily on petroleum export in their economic income and fiscal revenue. These countries would benefit a lot from the rising oil price which is not good for America s balancing of these countries and its influence in the Middle East. For Saudi Arabia, the petroleum output has reached around 11 million barrels per day and its export volume surpassed 7 million barrels per day and the demand for petroleum within Saudi Arabia remains relatively small. Saudi Arabia would achieve fiscal balance only if oil price surpassed 80USD per barrel, and clearly, the high oil price is good for Saudi Arabia. Though the oil price remains to be the biggest conflict between US and its ally Saudi Arabia, the bilateral relations would not change in future since the two countries are bonded by many interests. Since America has less say in pricing of crude oil trade, it could keep intervening on the crude oil output of Saudi Arabia in future and try to control Saudi Arabia, the largest oil-producing country of OPEC and further shift the output policy made by OPEC. Chart 6-5:Saudi Arabia Crude Oil Output Source:IEA Compiled by Founder CIFCO Chart 6-6:Saudi Arabia s Oil Price to Achieve Fiscal Balance III. US Impedes Russia through Low Oil Price Unlike Saudi Arabia, Russia is not bonded with America by interests. Though Russia s economy relies not as much as some countries in the Middle East on petroleum, the export of petroleum also contributes to Russia s economic income and fiscal revenue, 50% of which is resulted from the petroleum export. Therefore, Russia also inclines to high oil price. Both America and Russia are great powers and in long period of time, these two countries have been rivalries to each other and remained hostile. Since Trump came into office, he tried to improve relations with Russia. However, 26

27 the Russia Scandal brought tremendous stress and pressure on Trump which prevented Trump from advancing the progress. Meanwhile, House of Representatives passed a motion about sanctions on Russia in the second half of this year and limited the president s rights to unfreeze the sanctions. Later, America imposed many rounds of sanctions on Russia. In fact, the sanctions on Russia are more like an internal struggle. What worries America is the closer relations between Russia and allies of America, including Saudi Arabia and Europe, which is not good for America s balancing on Russia. In terms of crude oil supply, Russia is immune to America s influence. Russia didn t contribute much during the crude oil reduction during 2017 to the mid-year of However, Russia responded promptly reacting the increase output of crude oil in the past few months. Its output hit a record high within just three or four months which indicated that Russia would be more willing to increase its fiscal revenue and increase its market share by increasing its crude oil output. One main purpose for America s dragging down oil price is to restrict these countries which rely much on petroleum export. Russia, without doubt, is one of these countries. The declining oil price in the mid-year of 2014 brought severe damage to Russia s economy and Russia s economy stuck into stagnation during 2015 to 2016 and ruble witnessed severe depreciation and the fiscal condition kept worsening. Therefore, low oil price has severe influence on Russia. If America could control the oil price, it could balance Russia in both economy and finance. However, unlike Saudi Arabia and other OPEC members, America cannot shift Russia s petroleum output. Unlike Saudi Arabia and other OPEC members, Russia is free from America s intervention on its petroleum output which means that Russia is more flexible in its output adjustment. Chart 6-7:Russia Crude Oil Supply Source:OPEC Compiled by Founder CIFCO Chart 6-8:Russia Crude Oil Output & Predicted Value Source:IEA Compiled by Founder CIFCO 27

28 Chapter VII. Fund Positions From experience, CFTC total positions, fund net long positions and oil price is positively correlated. We summarized positions data of five major oil products listed in CME and ICE. Since these data are indicators in oil market investment and each oil product is highly correlated with each other, the change in positions could basically reflect the market mood. Statistics have shown that the total positions of five major oil products and non-commercial net long positions started to decline since the second quarter of this year. Besides, the withdrawal of capital and the declining bullish mood has driven the plummet of oil price. Since the fourth quarter of this year, we witness the plummet of fund positions of five major oil products. The data in the mid of November was cut in half compared with the data one month ago. In the meantime, we could see a rather sharp decline of total positions of five major oil products as well as net long positions. The total short positions doubled which indicated bearish mood was emerging. Through observing, the change in fund positions is found to appear earlier than in oil price and can be regarded as a leading indicator. From the overall market performance, we could see the sign of capital withdrawal since the oil price hit the peak in May When the oil price hit the peak in early October, fund long positions was withdrawn in a much faster manner while the oil price saw a sharp plummet. Chart 7-1:Net Long Positions of Five Major Oil Fund Products Chart 7-2:Changes in Positions Holding & Oil Price Outlook 28

29 Chapter VIII. Technical Analysis The bottom for oil price has been lifted since the crude oil price hit a new low within 10 years in February 2016 and Brent reached up to around 85USD per barrel. However, we hold the opinion that the bullish cycle started in early 2016 of crude oil was about to end. After the plummet of the crude oil price in the end of 2018, it is estimated that the Brent crude oil would form a new bottom at around 50USD to 55USD, WTI crude oil would form a new bottom at around 45USD to 50USD and SC crude oil would form a new bottom at around 400CNY. The crude oil in 2019 is very likely to be under adjustment and it would be rather difficult to hit a peak higher than this year. Chart 8-1:Crude Oil Technical Analysis Source:Webstock Compiled by Founder CIFCO 29