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Crude oil: falls a sinkhole
2020-03-07 20:06:26

    Friday (March 6) New York Mercantile futures exchange West Texas light oil futures settled at $41.28 a barrel in April 2020, down $4.62, or 10.1%, from the previous trading day, with a trading range of $41.05-46.38; London Intercontinental Exchange Brent crude oil futures settled at $45.27 a barrel in May 2020, down $4.72, or 9.4%, from the previous trading day, with a trading range of $45.18-50.45.

    As for the reasons behind the sharp drop, it is actually the result of the comprehensive effect of crude oil financial attributes and commodity attributes.

    On the one hand, from the perspective of the financial nature of crude oil. Because of the rapid spread of global public health events, the global economy is facing the biggest downward pressure since the financial crisis in 2008. After the Federal Reserve cut interest rates in an emergency, many central banks cut interest rates one after another. However, monetary easing did not bring abundant liquidity to the market. After the liquidity crunch, the stock market fell in succession, which is actually a high panic of market confidence. In addition to the stock market, crude oil in the commodity market is not immune to global risk assets. Correspondingly, treasury bonds and gold have become the first choice of safe haven assets.

    On the other hand, from the commodity attribute of crude oil. In China, Japan, South Korea and Europe, public health events have occurred one after another. The first impact is on the transportation industry. The demand for refined oil is the first one, followed by the downstream chemical industry. Saudi Arabia, which has been committed to reducing production, failed to negotiate with Russia. The reduction will expire at the end of March. In theory, countries will no longer have any production restrictions. There will be at least 2 million barrels / day risk increase in the future. The increase of supply and the decrease of demand are another sharp tool to cause the price falling of crude oil.

    Panic goes back to panic, but the world is still turning. For the future market, we should have less perceptual speculation and more rational waiting. Two core points need to be paid attention to in order to bargain-hunting rationally.

    First, the stock market has stabilized. As a barometer of the global economy, the stock market has too much smart money. If the Fed fails to cut interest rates at one time, there will be more interest rate cuts in the future. Driven by the Fed's interest rate cut, more countries will follow up in the future. With the existence of a loose monetary base, liquidity has increased and now only market confidence is poor. According to the time dimension of three or four months for China to fight against public health events, the global trend of controlling the spread needs to reach at least the third quarter. Of course, as a futures market, predictability is very important. From this point of view, the subsequent stabilization of the stock market may be ahead of schedule.

    The stabilisation of the stock market represents a decrease in global panic, signs of economic recovery and a shock rebound in crude oil. However, it is easy to predict the rebound, and even more difficult to predict the bottom. Where the bottom of the crude oil is, it needs to focus on another core point.

    The second is whether the production reduction alliance can be reunited. To add another word, Russia and Turkey have been fighting fiercely in Syria recently, and a ceasefire agreement has been reached after a long negotiation.Russia can't wait for a moment's respite to hold talks with Saudi Arabia on deepening production reduction. Since 2017, the production reduction alliance between Saudi Arabia and Russia has been contributing to stabilizing the oil market, but the oil price has always been tepid, behind which is the strong rise of American crude oil. At present, Russia and Saudi Arabia belong to the high oil price interest community. When the bottom of oil price is around 40 US dollars / barrel, it is hard for any oil producing country to bear for a long time. In other words, oil prices that fall below cost are unsustainable. The market is a dynamic balance. Even if the production reduction alliance is completely broken, low oil price will also promote more supply capacity out of the market. What's more, as long as there is hope for further negotiations, there is not much space below the follow-up oil price.

    In short, panic but not pessimism, bargain-hunting needs rational waiting. Take US crude oil as an example, the initial bottom is around 40 US dollars per barrel, which does not exclude another decline of 2-3 US dollars per barrel. The rebound needs to wait. It's only a matter of time dimension. If the negotiation is resumed, the rebound will happen in the near future. If the negotiation is broken, it will also rebound in the third quarter at the latest due to the improvement of demand. The last problem is the rebound height. This year's high rate is probably in the third quarter. The heights of production reduction and non production reduction are $55 / barrel and $50 / barrel respectively.