SunSirs: Crude Oil surged and fell in August, with Weak Supply and Demand Expectations struggling to Break Out of the Trend

In August, crude oil emerged from a trend of rising and falling, and in the first half of the year, the market continued to rise amidst supply concerns and the positive trend of the peak oil consumption season. Brent crude oil topped $87 per barrel, while WTI crude oil approached $83, reaching a nearly 9-month high. Afterwards, with the deterioration of macro data, the market turned sharply downwards, and near the end of the month, the WTI fell below $80. Under the combined effect of OPEC+ production control and weak economic data in oil producing countries, the supply-demand game intensifies, and the market shifts into a narrow range of fluctuations.

In early August, the Ministerial Meeting of the Organization of Petroleum Exporting Countries and its allies (OPEC+) was held, continuing the scale of previous production cuts and deepening the timeline for production cuts. The Saudi Ministry of Energy has extended the policy of voluntarily reducing production by an additional 1 million barrels in July until the end of September. At the same time, Russia has also imposed restrictions on its export scale, extended the restriction period, and agreed to reduce its oil exports by 300,000 barrels per day in September. The tightening of supply expectations is the main reason for the upward trend in the oil market.

In addition, there is also some support for the inventory and consumption ends. The US Energy Information Administration (EIA) has recorded a record decline in crude oil inventories. In addition, there has been a seasonal rebound in fuel consumption. Summer aviation and short distance travel bring benefits to the aviation coal and gasoline markets. Driven by the rebound in Chinese demand and the rebound in consumption brought about by the graduation season travel, coupled with the support of many stimulus policies, the oil market has seen consumption growth in the short term. However, the market generally believes that this is a phased process, and as the peak consumption season ends, the oil market may face a demand gap in the fourth quarter, which will lay hidden dangers for the oil market.

After mid August, the economic data is generally biased towards empty. A series of unexpected macro data has raised concerns about future energy demand in the market. The PMI data that best reflects economic expectations shows that in the past week, the initial value of Markit manufacturing PMI in August in the United States was 47, which was lower than expected, indicating that the US economy is cooling down. This may become a constraint on energy demand. Meanwhile, last Friday evening, Powell gave a hawkish speech at the Jackson Hole annual meeting, stating that if the economy and job market do not cool down, they will continue to raise interest rates. This indicates that whether the Federal Reserve will raise interest rates in the future depends on whether inflation and employment data can continue to fall. The expectation of interest rate hikes is also an important factor in suppressing oil prices.

Although in late August, positive inventory data and OPEC+balanced supply policies continued to play a role, providing some support to the oil market. However, weak demand has led to an intensification of pessimistic sentiment towards the outlook for crude oil demand, and the oil market has felt significant pressure.

On the supply side, OPEC+ supply expectation management will continue to play a role, and production reduction policies are expected to be tight but not loose. Especially in the context of weakening demand expectations, it is not ruled out that it will further deepen the production reduction policy. In addition, the US oil inventory data is relatively positive, at a historical low level. In the later stage, the US Department of Energy still has plans to purchase oil, and the supply side will continue to support the oil market in the future.

On the demand side, the medium-term demand outlook will shrink. On the one hand, the US driving season is gradually coming to an end, and coupled with the end of China's summer travel peak season, the aviation coal and gasoline sectors will have a certain impact.

Overall, there is a general consensus in the basic market that both supply and demand in the energy sector will weaken in the future, leading to an intensification of the supply-demand game in the oil market and a rebalancing of supply and demand. This will continue to put pressure on oil prices. In the short term, the driving force for the oil market to continue to rise is limited. Under the hedging of weak demand expectations and tight supply, the high probability range is mainly characterized by narrow fluctuations.

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