When will the sword of Damocles fall for oil prices?

Since April, the market’s expectations for the Fed’s tightening to accelerate and the U.S. economy to weaken in the future have been further strengthened. The results of the superimposed quarterly report period have generally been weak. Under the worries of stagflation, the U.S. stock market has experienced an accelerated correction recently. When will the subsequent U.S. inflation pressure be systematically alleviated. Fed policy expectations and key factors in the trend of U.S. stocks.

The U.S. inflation data in April showed that inflationary pressures were still relatively high, and the follow-up inflation trend was the focus of observing the shift in monetary policy. The US CPI data in April showed that inflationary pressures have not eased significantly. The US CPI in April fell to 8.3% year-on-year marginally, and the core CPI in April fell to 6.2% year-on-year marginally, but the decline in both was still less than market expectations. The marginal decline in the year-on-year inflation data is more based on the rise in the base, while the seasonally adjusted core CPI is a marginally larger-than-expected rise. In terms of specific items, the continuous increase in the price of the service industry month-on-month is the core factor supporting inflation in the United States, while the increase in energy prices brought about by the Russia-Ukraine conflict has eased marginally. In addition, supply chain problems and rising costs due to sticky U.S. housing prices are also reflected in inflation.

In the early 1980s, the high point of the 10-year U.S. Treasury bond yield at the end of the stagflation period in the United States was more than a year behind the turning point of inflation year-on-year, but it coincided with the time when inflation fell systematically month-on-month. Looking ahead, with the subsequent recovery of the U.S. inflation base, the direction of U.S. inflation year-on-year is relatively certain, but the uncertainty of the magnitude and speed of the decline is still relatively high. From the demand side, the follow-up will focus on the demand of the service industry and when the real estate will cool down significantly. In addition, we need to pay attention to when the growth rate of wage data will fall back, and the current wage-inflation spiral has not been completely broken. The supply side mainly focuses on: 1) the recovery of the global supply chain under repeated epidemics; 2) the impact of geopolitics such as the Russian-Ukrainian conflict on energy and other commodities.

The drop in crude oil prices often has a significant impact on market inflation expectations, and is also an important signal for the fall in the nominal interest rate of 10Y government bonds. At the end of 2018, Trump adopted active policies + using geopolitical events to pressure Saudi Arabia to reduce oil prices, which will help the Fed to quickly turn and the market. The rebound provided the foundation. Since April, the commodity market has stopped the rapid upward trend and turned to high volatility. The turning point of the bull market in the commodity market may appear at the falling point of the energy and agricultural indices. Historically, whenever crude oil prices fell, 10Y nominal interest rates followed suit. The sharp drop in oil prices at the end of 2018 was partly due to the active policies of the United States: 1) The United States granted eight countries and regions temporary exemptions to purchase crude oil from Iran. 2) U.S. shale oil production and crude oil inventories continue to rise. 3) The Sino-US trade war started by Trump in 2018 led to intensified trade tensions among countries, rising policy uncertainty dampened business and financial market sentiment, global PMI fell sharply, and China’s import value and US personal service consumption expenditure fell sharply year-on-year , causing the market to panic about a sharp reduction in crude oil demand in the future. On the other hand, it is because of the opportunity brought by the murder of Khashoggi: the murder of Khashoggi attracted the attention of international public opinion on October 2. Trump took advantage of the situation to put pressure on Saudi Arabia, and the declaration considered re-evaluation of “US-Saudi relations”. Saudi Arabia had no choice but to Announced on October 22 to increase crude oil production, which put a huge downward pressure on oil prices.

Compared to 2018, when will the sword of Damocles fall for oil prices? The demand side is still resilient in the short term, and the focus is on changes in the geopolitical level of the supply side: Saudi Arabia’s production increase + the Iran nuclear deal. Under the general direction of the gradual weakening of global demand, it is difficult for oil prices to reach new highs systematically. However, in the short term, easing and falling back still depends on whether breakthroughs can be made at the geopolitical level. On the whole, it is more difficult than 2018. On the demand side, US service consumption is still resilient + travel demand has picked up in the summer peak season, crude oil demand is still resilient in the short term, and low inventories have also increased the short-term resilience of oil prices. From the supply side, global crude oil production continued to rebound, but was still lower than the pre-pandemic level. The mid-term elections on November 8, 2022 are an important goal of Biden in 2022. The Biden administration needs to reduce oil prices. The United States has taken the first step towards the relaxation of sanctions on oil-producing countries other than Russia. The subsequent key geopolitical factors affecting oil prices are: Saudi Arabia’s willingness to increase production + the conclusion of the Iran nuclear deal. 1) Saudi Arabia’s production increase: The United States is already making efforts, but the policy is weak, and it is expected that opportunities similar to 2018 will be needed. It is recommended to pay attention to Saudi Arabia’s response after the US officially implemented the “NOPEC” antitrust law + further US diplomatic measures against Saudi Arabia. 2) Iran’s production increase: Whether the Iran nuclear agreement can be reached, it is recommended to pay attention to the next progress of the Iran nuclear agreement. How can Iranian crude oil substitute for Russian crude oil? The output is about 30%, and the export volume is about 50%. Iran’s current average oil production level is equivalent to about 30% of Russia’s oil production capacity. Under the circumstance that Russia’s exports are blocked, if Iran can return to its peak export status in 2011, it will be able to fill 51.8% of Russia’s 10-year average export volume.

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