Crude Oil Market or Continued Oversupply-Demand Pattern

Since this year, the shadow of economic and trade frictions and the slowdown of global economic growth have always dominated the mood of the crude oil market. The fluctuation of international oil prices makes it difficult to make major breakthroughs. Institutions predict that U.S. crude oil exports are expected to grow further, and the global crude oil market may continue to oversupply. According to CNBC, Citigroup's commodity research team predicts that the new pipeline will help break through the bottleneck of shale oil transportation in the United States, further increase the volume of U.S. crude oil exports, and further highlight the contradiction of oversupply in the global crude oil market. With the help of the new pipeline, by the end of this year, U.S. oil exports will increase from the current 3 million barrels per day to 4 million barrels per day, and another 1 million barrels per day next year. Last year, U.S. exports grew by 970,000 barrels per day over the previous year.

It is reported that starting this month, Plains All American Pipeline LP, an American oil and gas pipeline transportation, marketing and storage company, launched a new pipeline, Cactus II, to deliver 670,000 barrels of crude oil produced in the Permian basin, the core area of American shale oil, to the Gulf of Mexico. This means that the Permian basin pipeline transportation problem, which has long plagued American shale oil producers, has begun to be solved.

Citigroup believes that the commercial use of the new pipeline will help break through the bottleneck of oil transportation in the Permian basin. "Within six to eight months, the United States will produce 4 million barrels a day, much more than the entire North Sea," said Morse, head of global commodity research at Citigroup. Crude oil will be shipped everywhere, and if U.S. production reaches 6 million barrels a day in three years, it will become a global benchmark. Local production is expected to double to about 8 million barrels per day by 2023. Over the past 10 years, U.S. oil production has more than doubled. The United States has become the largest oil producer, and its oil production has now approached a historic high. According to the U.S. Energy Intelligence Agency (EIA), U.S. crude oil production remained at 12.3 million barrels per day as of the week of 15 this month, only 100,000 barrels per day less than the highest level in history.

Prior to that, the lack of infrastructure needed to transport crude oil from Dezhou Oilfield to export ports and enter the world market restricted the volume of U.S. crude oil exports and global crude oil supply. Now the problem has been solved. With the construction of crude oil pipelines, the U.S. crude oil export capacity will also be enhanced. The entire Gulf Coast, Texas and Louisiana are expanding their unloading facilities, and shipping facilities are expanding along the Gulf Coast. Citigroup expects the U.S. export capacity to expand to 6 million barrels a day, or even higher. On the one hand, the Organization of Petroleum Exporting Countries (OPEC) continued to reduce production, which promoted oil prices to strengthen. On the other hand, the rising production of shale oil in the United States, the decline of global demand expectations and the strong US dollar hindered oil prices to rise. The two forces have gone from strength to strength, which has become the main force behind the large fluctuations in international oil prices since this year.

Owing to trade frictions, the downside risks of the global economy are increasing, and crude oil demand is difficult to boost. OPEC still insists on measures to reduce production, and the output and reduction range of each oil producing country in July exceed the expectation of the reduction agreement. According to the OPEC Technical Committee, the reduction rate in July was 159%, OPEC's compliance rate in July was 156%, and non-OPEC members'reduction rate was 166%.

Once the supply of U.S. crude oil to the international crude oil market increases, the output reduction effect of OPEC will be greatly offset. At the same time, the new oil supply from the United States has also put OPEC in a dilemma. Francisco Blanch, head of commodities and derivatives research at Bank of America, said OPEC's market share had fallen by 1% annually over the past seven years. For Saudi Arabia eager to achieve budget balance, the process of achieving global oil market balance is too slow. Analysts believe that Saudi Arabia will increase output cuts and reduce exports in the future, while the continued decline in production in Iran and Venezuela will accelerate the process. As for non-OPEC countries such as Russia, the possibility of continuing to cooperate with OPEC is due to the anticipated economic slowdown, resulting in pressure to reduce production. But with Russia's recently announced break-even oil price target of less than $50, and the recent slight rebound in Russian exports, the market speculates that Russia may be divided on the way to cooperate with Saudi Arabia to reduce production. Market equilibrium is difficult to achieve. U.S. light crude oil futures prices fell back from a year high of $75 per barrel in October 2018. Oil prices have been volatile, falling to a low of $42 on Christmas Eve last year, and have since recovered, and are now in the middle of $50. Brent crude oil futures hovered around $60 a barrel this month.

Some analysts pointed out that the trend of crude oil price still needs to pay attention to the implementation of OPEC's production reduction plan, the change of supply and demand in crude oil market and the trend of US dollar.

Joint Organisation Data Initiative (JODI) data show that since the third quarter of 2014, the decline rate of oil consumption has reached the highest level. The last time demand fell at this level was between 2014 and 2015, when oil prices plunged because of falling consumption, increased production of shale oil in the United States and Saudi Arabia's refusal to cut production. The question of when the international crude oil market will be balanced has always been a puzzle for the market, and it seems that this goal has not been achieved.