"Five reasons" contributed to the collapse of international oil prices, the G20 summit may become an inflection point in oil prices



【Summary】Brent crude, the global benchmark, plunged 6.1 per cent to a one-year low of $58.80 a barrel and fell 22 per cent this month, putting oil prices, which have hit lows in recent times, back in the global spotlight.

Brent crude, the global benchmark, plunged 6.1 per cent to a one-year low of $58.80 a barrel and fell 22 per cent this month, bringing oil prices, which have recently hit lows, back into the global spotlight.

On November 23, the downward trend in oil prices intensified. Brent crude plunged 6.1 per cent to $58.80 a barrel and WTI crude fell 7.7 per cent to $50.42 a barrel in New York, a one-year low. The world's two major crude oil pricing benchmarks: Brent (Brent) and West Texas Intermediate (WTI) crude oil are already in bear markets.

As defined by international markets, that means both prices and recent peaks are down at least 20%.

Volatility in oil prices has surged to its highest level since 2016, with investors rushing to protect against further sharp price declines. Volatility is a measure of investors' demand for a particular option, and the volatility of very bearish recently sold options has exceeded 60%, twice as much as two weeks ago.

The drop in oil prices also added to the pressure on U.S. energy stocks. In the past week, BP shares fell 2.4 percent and Royal Dutch Shell shares fell 5.5 percent. Exxon Mobil fell 4.4 percent, while U.S. shale pioneer natural resources fell 6.0 percent. Energy indices fell, dragging the S & P 500 back into correction territory. U.S. stocks have extended their decline since their September 21 high to 10 percent.

Flynn, a senior market analyst at Futures Price Group, said concerns about a slowdown in global energy demand and a possible slowdown in China had investors worried that oil prices would be an ominous signal for global markets. Madden, a market analyst at CMC Markets, believes that traders are beginning to wonder whether the downturn in the oil market also reflects weak demand in the future, which has an expected impact on prices, thus plunging oil prices into a vicious circle.

Industry experts say there are five main reasons for the sharp drop in oil prices:

The first is the technical factor: the technical factor mainly comes from the shrinking trading volume. Last Friday was the first day after Thanksgiving in the United States, and light trading volume amplified the price drop. Dealers said Friday's decline was at least partly attributable to the reduced volume of trading in the commodity market's closing range after Thanksgiving. Lower trading activity could exacerbate asset movements and crude oil is already in a vicious downward trend, which will only drive prices down quickly.

The second is crude oil leveraged trading to amplify the decline: traders said that another factor in Friday's decline came from hedge fund oil speculation. Customers who make leveraged bets on oil prices and lose money when oil prices plummet are required by brokers to pay additional funds to meet minimum margin requirements, resulting in margin calls. Margin calls can lead to forced selling, amplifying both upside and downside movements.

The $1 billion Anduran Commodities hedge fund, which fell 20 per cent in October as oil prices reversed course, has fallen 12 per cent this year. The sharp fall in oil prices in November will also cost many leveraged funds that are optimistic about the recovery in oil prices.

The third is that the market may be oversupplied: the marginal relaxation of US sanctions against Iran will ease the supply tension in the short term; on the other hand, the United States has become the world's largest oil producer, and crude oil inventories have been rising for many weeks. The U.S. Energy Information Administration said U.S. oil production topped 11 million barrels a day earlier this year. In addition, OPEC production is at its highest level since 2016, and output from major producers Russia and Saudi Arabia has also hit record highs.

In addition, China's demand for oil by-product gasoline fell to its lowest level in 13 months. According to Reuters, the trade dispute is hurting demand for oil in the world's second largest economy and the largest energy importer. These factors have raised concerns that supply is outstripping current market demand.

The fourth is that Trump supports the drop in oil prices, while Saudi Arabia cannot push up oil prices: U.S. President Trump has been advocating lower oil prices and tweeted last week urging lower crude oil prices and thanking Saudi oil prices for the recent drop. He wants to keep fuel prices low and maintain arms exports to Saudi Arabia.

Finally, a rising dollar: a rising dollar is not conducive to a recovery in oil prices priced in dollars. When the dollar appreciates in the channel, the equivalent of assets priced with it also appreciates, which means more expensive for buyers using other currencies. Since the beginning of this year, the US dollar index has been in an upward channel. From the low point in late September to the present, the US dollar index has risen by 2.52, returning to the level of mid -2017.

G20 summit or oil price inflection point

The OPEC meeting to decide whether to limit production is scheduled to be held in Vienna on December 6, but just before that, the G20 summit in Buenos Aires may instead determine the trend of oil prices in 2019 in advance. Saudi Crown Prince Salman and Russian President Vladimir Putin, who lead the world's two largest oil exporters and have been jointly managing the oil market for the past two years, plan to enter the Argentine capital this week. Equally important is US President Donald Trump, who, in his Twitter diplomacy, opposes OPEC's push for higher oil prices. Many energy analysts expect Trump, Salman and Putin to discuss oil prices at the G20 summit.

The Saudi and Russian energy ministers plan to travel to Buenos Aires with their chiefs. Their possible presence reinforces the impression that Saudi Arabia and Russia will reach an agreement ahead of time.

This is not the first time the two energy superpowers have used the G20 to determine oil policy. At the Hangzhou summit in China in early September 2016, Putin and Salman discussed how to revive oil prices. Hours after the private meeting, Saudi and Russian oil ministers attended a joint news conference. A few days later, they announced that the Organization of the Petroleum Exporting Countries and some non-OPEC countries would cut production. In the following year, oil prices began to gradually recover. However, with the United States demanding that Saudi Arabia impose a price limit on oil prices, the tripartite involvement is more complicated than the decision-making of the two giants. Market analysis suggests that Saudi Arabia may still agree to cut supply, but the final scale of the reduction may be lower, or it may be necessary to unilaterally reduce production in the absence of a formal agreement to avoid provoking the United States. (from the Changxing Island petrochemical market official website)

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