During the May Day holiday, international oil prices experienced an unusually sharp decline. Specifically, the futures price of West Texas Intermediate (WTI) crude oil in the United States fell by 4.44% during this period, while the cumulative decline in Brent crude oil futures prices was 3.66%. Brent crude oil prices once probed down to $82.85 per barrel, a price that has fallen by more than 9% from the peak in April earlier this year.
Under the influence of the downtrend in international oil prices, the domestic commodity futures market as a whole went down, where the main crude oil contract 2406 experienced a gap-down fall, with a decline at one point exceeding 5%, hitting the lowest price level since March 24th. This trend further left room for the downward movement of domestic refined oil prices.
According to a notice issued by the NDRC on April 29th, in view of the recent change in oil prices on the international market and in accordance with the current mechanism for forming refined oil prices, starting from 24:00 on April 29th, 2024, domestic gasoline and diesel prices (standard quality, same below) will be reduced by 70 yuan per ton. This has been the ninth adjustment of oil prices within the year, and it is also the second reduction of the current year.
Geopolitical factors have always had an impact on international oil prices that cannot be ignored. Since the beginning of this year, including the Russia-Ukraine conflict, the Palestinian-Israeli conflict, and other geopolitical situations have continuously influenced the direction of the international crude oil market. At the beginning of this year, Brent crude oil prices started at about $74 per barrel and soared to a high of $90 per barrel in April. Since the start of the year, China has initiated several rounds of oil price hikes. As of April 18th, the price has been raised a total of 5 times. However, with the repeated conflicts between Palestine and Israel in April, Brent crude oil started to oscillate downward. Especially the temporary ceasefire negotiations between Hamas and Israel have quickly cooled down the geopolitical risks.
The uncertainty of the Federal Reserve’s monetary policy has also had an impact on the crude oil market. At the end of last year, the market was optimistic about the Fed possibly starting to cut interest rates this year, with the earliest cuts expected to begin in June. However, the challenge of high inflation in the United States has not yet been resolved. Although the latest published non-farm employment growth data in the United States in April did not meet expectations, prompting traders to bring forward the expected timing of the Fed’s first interest rate cut from November to September, at the previous interest rate meeting, the Fed kept rates unchanged and indicated that interest rate cuts could be delayed in the face of high inflation prospects. Therefore, US inflation and employment data will need to show sustained and clear performance before the market can be convinced that the Fed will reverse policy direction and start lowering interest rates, and these are key factors affecting economic growth in the world’s major oil-consuming countries and regions.
Observations at the trading level also indicate that the fall in crude oil prices in the past week has been the biggest single-week drop in the past three months. According to calculations by the Energy Research Center, since April, the net long positions held by speculators have stopped increasing, and net long positions have continued to be reduced in the past three weeks, indicating that funds have become significantly more cautious regarding future oil price expectations. At this point, whether there will be changes on the supply side of crude oil has become key in determining the future trend of oil prices. CITIC Construction Investment Futures, citing the latest monthly report data from the International Energy Agency, pointed out that OPEC+’s production exceeded its quota by 500,000 barrels per day, while OPEC’s production was 560,000 barrels per day higher than its quota.
During the meeting held on April 3, the JMMC did not discuss the UAE’s overproduction issue, instead focusing on urging Iraq and Kazakhstan to adhere to production quotas, and requesting them to provide concrete and feasible compensation plans for production cuts. The subsequent joint production cut action announced by OPEC+ on May 3 seems to be a strategy for the organization to demonstrate its control to the global market, and it is expected to maintain this policy in the future.
Currently, if the reduction of 2.6 million barrels per day is stopped immediately while oil demand remains stable, oil inventories could potentially increase by 2.6 million barrels daily. This could lead to a downward trend in oil prices, which is an outcome that oil-producing nations cannot afford. Therefore, it is anticipated that OPEC+ will announce an extension of the production cut policies for the second half of the year at the upcoming meeting on June 1.
According to financial reports, most traders and analysts expect OPEC+ to extend the production cut measures until the end of the year. 87% of respondents predict that the cuts will continue. Energy Aspects analyst Richard Bronze stated, “Before deciding to increase supply, OPEC+ wants to see a continuous sign of market tightness, so it is very likely that they will choose to extend the production cuts.”
Domestic oil prices also underwent adjustments in April. With fluctuations in international crude oil prices, domestic refined oil prices were decreased on April 29. The National Development and Reform Commission announced that from 24:00 on April 29, 2024, the prices of domestic gasoline and diesel per ton will be reduced by 70 yuan. This was the second decrease of the year, and the ninth price adjustment. Monitoring data shows that during the period from April 16 to April 28, the average prices of both London Brent crude and New York WTI crude decreased by 2.22%.
Nationally, according to the comprehensive data calculated by Zhuochuang Information, after this price adjustment, the retail prices of 92 octane gasoline, 95 octane gasoline, and 0 diesel were reduced by 0.05 yuan, 0.06 yuan, and 0.06 yuan respectively. For example, for a family car with a 50L fuel tank, filling up a tank of 92 octane gasoline will save approximately 2.5 yuan. The reduction in domestic oil prices reflects the government’s strategy for stable oil market regulation and demonstrates flexibility amidst international oil price volatility.
Historical data indicates that apart from the special events in 2020, oil price fluctuations in May tend to offset each other. Lin Boqiang, dean of the China Energy Policy Research Institute at Xiamen University, pointed out in an interview with the media: “Since February 2022, international oil prices have basically fluctuated around $80 per barrel. When the market news is positive, oil prices tend to rise, and vice versa.” He predicted that the short-term possibility of oil prices breaking through $90 per barrel is not great, and will continue to fluctuate around $80 per barrel.
In this regard, Ma Jiancai, a refined oil analyst at JLC, also said that after entering the new pricing cycle, the crude oil change rate is only 0.9%, which implies that the corresponding price increase will be maintained at around 35 yuan per ton.
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