As the COVID-19 pandemic continues to curb crude oil demand and investors' concerns about a global recession intensify, international oil prices have almost fallen to freezing point.
crude oil has plummeted to its lowest level in 2018
As the global market returns to the panic mode, crude oil shorts have taken strong moves again, and oil prices have fallen to their lowest level in 2018.
U.S. crude oil fell 24.4%, or $6.58 on Wednesday, closing at $20.37 a barrel, the lowest level since February 2002, and broke through the important mark of $20 intraday by just 6 cents.
WTI crude oil fell 56% in the past ten days, the worst ten-day performance since the launch of the crude oil contract in 1983. It fell nearly 25% yesterday to the third largest drop in history. In the morning of today's trading, U.S. crude oil was still falling, at $21.771 as of press time, down 2.3%.
Brent crude oil fell 14.1%, or $4.07, to $24.67, the lowest since 2003. Brent crude also experienced its worst month of all time, down more than 46%.
"The market plummeted. The market tried to find bottom support, but it seemed that it could not be found," said Gene McGillian, vice president of research at Tradition Energy. "This global pandemic caused global fuel demand to collapse."
Goldman Sachs said that by the end of March, global oil demand may fall by as much as 8-9 million barrels per day. Citibank expects global crude oil demand to decrease by 4 million barrels per day in 2020, a record high, and crude oil demand is expected to shrink by 11 million barrels per day in the second quarter.
Crude oil futures have fallen by more than half in the past 10 days. During this period, schools and enterprises have suspended work. Governments of various countries have introduced measures to restrict residents from gatherings. Western countries have also entered the "lockdown" mode. As of now, Italy, Spain and France have locked down the cities, the EU has closed its borders for 30 days, and 10 Schengen countries have begun to implement border control. Trump said on Twitter on Wednesday that the border between the northern United States and Canada will be closed to ban all non-essential passage.
On the 18th local time, British media such as " Guardian ", "Independent", " Daily Telegraph " reported that London may be closed in a few days. CNN also learned from several sources that London is going to "partially lock down".
British Financial Times: London may be closed before the weekend
In addition, after the OPEC+ production cut agreement collapsed, various oil-producing countries were like "removing the shackles". As the production increase and price reduction strategies were pressing step by step, crude oil supply increased rapidly.
The Saudi Arabian Ministry of Energy said on Wednesday that it has directed the state oil company Saudi Aramco to continue supplying crude oil at a record 12.3 million barrels per day in the coming months. Crude oil supply will be increased to this level in April, and crude oil exports will also increase to more than 10 million barrels per day from May, also a record high.
In comparison, Saudi Arabia's daily production in February was about 9.7 million barrels. Currently, UAE , Iraq and Kuwait are also following Saudi Arabia's footsteps to start a price war, while Russia is another OPEC+ oil-producing country that may increase production.
John Kilduff of Again Capital said: "Saudi Arabia has become arsonist in the crude oil market. Its rapid increase in production capacity has added endless fuel to crude oil shorts. Oil prices seem to be unable to see the bottom in the short term. I think WTI crude oil will fall to around $18.00 per barrel in the future."
Bank of US Merrill Lynch said that the prices of WTI crude oil and Brent crude oil may turn into a positive price difference, and oil prices may fall below $20 per barrel. Goldman Sachs lowered its Brent crude oil futures price forecast for the second quarter of 2020 to $20 per barrel from the previous $30 per barrel. Citibank expects the average crude oil price to be $17 per barrel or less in the second quarter of 2020.
As oil prices continue to decline, Iraq, one of the OPEC members, has urged OPEC+ to hold another emergency crude oil meeting. But judging from the Russian attitude, the meeting is difficult to advance.
Russia had previously stated that the current plummeting oil prices is expected and Saudi Arabia's actions are not wise.Russia currently has no plans to meet with Saudi Arabia. A spokesperson for Russian President Putin pointed out: The market has expectations for the continued decline in oil and energy prices, and we are also paying close attention to industry trends.
A large number of oil tankers headed straight toward Middle East
As oil prices continue to fall, buyers from all over the country, including China, have begun to take action one after another. According to Xinde Maritime Network on the 18th, a batch of Chinese super-large tankers have set sail to the Middle East recently.
At present, the average freight rate of VLCC (very large crude carrier) has increased from US$30,000/day in mid-February to US$210,000/day last week, an increase of up to 600%. After Saudi Arabia snatched up to 25 VLCCs in one go, the VLCC freight rate even exceeded US$400,000 per day.
VLCC freight trend chart (Photo source: refinitiv)
Judging from the VLCC weekly daily rent level since 1990, the VLCC daily rent level on Friday and this Monday was at a historical high in the past 30 years (only lower than the high after the US sanctions on Iran in the fourth quarter of last year).
Last week, VLCC lease transaction volume began to increase significantly, indicating demand for oil grabbing. According to the (not all transactions) VLCC spot lease transactions collected by Clarksons, 46 VLCC spot leases were sold last week (the loading dates were mainly concentrated in late March and early April).
In contrast, there were 28 ships last week, with an average of 27 ships from January 1 to March 8, 2020, and an average of 31 ships for the whole year of 2019. It can be seen that the transaction volume of VLCC leases began to increase significantly last week.
Reuters had previously reported that due to the increase in demand, the freight rates for large tankers from Persian Gulf to China have almost doubled. According to the estimate of the VLCC Middle East-China crude oil freight index released by the Baltic HNA Exchange daily, the VLCC Middle East-China crude oil freight rate rose from US$1.5 per barrel on March 5 to US$7 per barrel.
According to a VLCC loading 2 million barrels of crude oil, the round trip from the Middle East to China is generally 40-50 days, with a freight rate of US$1 per barrel, corresponding to a VLCC daily rent fluctuation of US$40,000-50,000.
freight rate is the result of the supply and demand game between the two sides of the ship and the cargo market. A sharp rise in short-term demand will inevitably push up freight rates. For crude oil demanders, the current increase in freight rates is acceptable compared to the cost decline caused by the decline in oil prices.
Industrial Securities (601377, Stock Bar) stated that based on the estimate of the proportion of crude oil freight rates of the Middle East to Asia routes to oil prices over the past 20 years (inaccurate value), the results show that from 1998 to the present, the minimum value of this proportion is 1.1%, the highest value is 25.5%, and the average value is 5.1%.
Recent oil price and freight trend chart (Photo source: Industrial Securities)
The breakeven point of VLCC is generally between 20,000 and 30,000 US dollars/day. According to the breakeven point of US$30,000/day, the current freight price of US$250,000/day corresponds to an annualized profit of US$78.1 million for a VLCC.
In 2015, OPEC production increase and oil price plummeted brought about the previous bull market for tankers, which is very similar to the current situation. The average daily income of VLCC in 2015 was US$65,000 per day, and the highest exceeded US$110,000 per day in the fourth quarter.
According to Clarksons data, OPEC crude oil production increased by 1.26 million barrels per day and 1.65 million barrels per day from 2015 to 2016, and global crude oil production increased by 3.12 million barrels per day and 520,000 barrels per day.
Image source: guancha.cn
Some media reports that by April 20, the global market demand for super-large tankers leasing will reach 60 ships, and the daily expenses will rise from US$100,000 to US$200,000.
The global super-large oil tankers are in extreme shortage. Whether they are transported to domestically or leased to other countries, it is good news for Chinese oil tankers. Currently, China has the largest fleet of super-large tankers in the world (84 ships).
As of March 2020, there were a total of 815 VLCCs worldwide (of which 638 Iranian ships were sanctioned by the United States and could not collect goods in the market), and 84 VLCCs accounted for 10.3% of the global VLCC capacity (excluding 10.8% of Iranian capacity).
Where can I put the crude oil back?
According to Clarksons data, crude oil consumption demand increased by 1.88 million barrels per day from 2015 to 2016, respectively, but with the pandemic this year, global crude oil consumption demand is under certain pressure.
OPEC's latest monthly report shows that the growth of global daily crude oil consumption in 2020 was reduced from 990,000 barrels to 70,000 barrels, and said there is a possibility of continued reduction. According to media reports, some institutions also predict that crude oil consumption may decline significantly this year.
If crude oil consumption demand declines significantly, while the increase in production remains unchanged, it may further put pressure on oil prices, stimulate demand for replenishment, but it will increase the speed of inventory increase.
According to the Times of India on March 17, two sources revealed that India plans to increase its strategic oil reserves (SPR) at a time of low oil prices in Saudi Arabia and the UAE.
A official who asked not to be named said: "For us, now is the right time to finalize the deal and fill the strategic oil reserves." Another source said that the Ministry of Petroleum of India has notified the Ministry of Finance to release about 480-50 billion rupees (US$673.7 million) and order large batches of oil, and transported by 8-9 large tankers to fill in stocks.
Bloomberg reported on March 16, the United States will start purchasing crude oil for strategic oil reserves in the next two weeks, planning to purchase about 77 million barrels.
Early, Washington announced last week that the government would purchase a large amount of crude oil, a move aimed at taking advantage of the low oil prices to supplement strategic oil reserves while providing some much-needed support to the local oil industry. It is reported that the US strategic oil reserves have the ability to store 713.5 million barrels of crude oil, and currently hold about 635 million barrels.
U.S. Strategic Petroleum Reserve Mechanism (Photo source: CNBC)
Compared with the United States, which has a low dependence on overseas oil, China imported as much as 500 million tons of oil in the past 2019, and it is even more necessary to increase its strategic oil reserves.
Due to the current public health emergency, the demand for crude oil has decreased, coupled with the increase in production between Saudi Arabia and Russia, the current crude oil price is very attractive, which is a good time to supplement the strategy.
After realizing that its own crude oil dependence is high, in 2002, my country began to build a strategic oil reserve base, building four reserve bases: Zhoushan Aoshan, Ningbo Zhenhai, Qingdao Huangdao and Dalian, and reserved about 30 million tons of oil, equivalent to 210 million barrels, equivalent to China's import volume in one month.
At present, China has completed two phases of construction of 9 major national oil reserve bases. JPMorgan Chase also estimated that China's strategic crude oil reserves reached a level of just above 500 million barrels at the end of 2016, which can meet the import volume of 70-75 days.
China Zhoushan Aoshan Petroleum Reserve Base (Photo source: Google Map)
2020 is a critical year for my country to complete its strategic oil reserves, and the construction of the third phase of the reserve base is about to be completed. It is expected that this base will add 28 million to 85 million tons of crude oil strategic reserve inventory to my country, which is equivalent to the net oil import volume reserve capacity of three months.
Low-price oil storage, this year is the best time. If it is not restricted by infrastructure, including commercial inventory digested in March and newly built strategic reserve bases, in theory, China may have about 200 million barrels of crude oil import space.
