Crude oil expected to rise

In May, the strong trend of crude oil market is relatively obvious. On the whole, there are not many unexpected events in the oil market in May, and several factors that affect the trend of oil prices and their logic and context are also relatively clear.

EU bans Russian oil

The first is the EU's proposal to implement a crude oil ban on Russia. The proposal was put forward at the end of April, and it was officially submitted and discussed on May 4. The proposal attracted widespread market attention once it was announced. In particular, Germany, which was originally an opponent of the proposal, suddenly changed its attitude to support after the new prime minister took office, which greatly increased the market's expectations for the possibility of the plan's implementation, aggravating supply concerns. International oil price changed its turbulent pattern from the end of April to a strong one, which was largely driven by the news, and set the tone and support for the overall oil price trend in May.

However, this obvious bullish event did not cause a rapid and substantial rise in oil prices or a sustained surge in oil prices, the reasons are as follows:

First, after the Fed's interest rate hike was implemented, the macro pressure brought by the upward movement of the US index, including the second downgrade of the global economic growth forecast by the World Monetary Organization, and several major banks and institutions lowered the US economic growth forecast, resulting in a decline in risk appetite in the financial market and a rise in hedging demand. This led to several rounds of sharp falls in US stocks after raising interest rates, and depressed global stock markets and commodities, including crude oil.

The second is the downward adjustment of crude oil demand forecast after the continuous fermentation of the epidemic. The damage to crude oil demand caused by this round of epidemic is mainly reflected in Asia, represented by China as a major crude oil consumer, which has triggered three major institutions (EIA, OPEC, and IEA) to consistently lower their forecasts for crude oil demand. In the reports in the last two months, OPEC+ successively lowered their global crude oil growth forecasts due to the "global economic downturn and the epidemic's damage to China's demand." The spread of the epidemic has tightened the control policies of various countries, and logistics, production, import and export all have been affected to a certain extent. Moreover, there has been a large-scale spread of monkeypox virus in Europe and the United States, although its pathology is not as complex as COVID-19, but it can also be said to make things worse.

Third, the repeated shelving of the proposal itself has caused the market to evaluate the possibility of its implementation many times. Since the proposal needs to be passed unanimously by all 27 member states of the European Union, and the opposition represented by Hungary, which is highly dependent on Russian oil (about 65%), opposes the proposal, which has led to repeated discussions on the proposal.

The SPECIAL European Union summit has been held in Brussels, Belgium, from May 30 to 31, and the EU has reviewed the sixth round of sanctions against Russia. On the first day of the summit, EU leaders reached an agreement to partially ban oil imports from Russia, covering oil supplies through the sea, with a temporary exception for oil supplied through pipelines. For Hungary, which imports Russian oil through pipelines, the ban has no real impact. However, it should be noted that the EU has not yet released the details of the oil embargo against Russia, and what we can know at present is that the proposal may involve shipping, tariffs and exports of Russian crude oil and crude oil products.

Gasoline price surges and peak driving season starts in US

Gasoline price kept refreshing new high in US in recent weeks. The average price of a gallon of gasoline has risen to $4.59 in the US, up about 15% from the same period last year, according to the American Automobile Association (AAA). There were many reasons behind soaring gasoline price in US. Firstly, the Russia-Ukraine conflict and the Western sanctions aggravated the uncertainty, ending up with higher crude oil price, which laid foundation for soaring gasoline price. Secondly, the summer peak driving-season will come soon. With growing demand, price of gasoline hiked. Meanwhile, gasoline production was also under pressure from higher-margin diesel and aviation fuel. Fuel manufacturers gave priority to diesel and aviation coal production, affecting gasoline capacity, while US crude oil inventories were at historic lows. The repeated releases of oil reserves further reduced inventory and tightened the supply side. Finally, gasoline producers showed inadequate intention to expand capacity under capital pressure, not ruling out the need for gasoline companies to maintain average annual capacity growth to resist risks and the possibility of driving up gasoline prices.

In May, the US Environmental Protection Agency issued a 20-day emergency exemption for high-ethanol gasoline mixtures. This temporarily allows more gasoline to enter the market and expand the availability of fuel. Biden intends to abolish anti-haze regulations and implement a federal gasoline tax exemption to curb the rise in gasoline prices, but market analysts generally believe that Biden's move may help ease the rise in oil prices in the short term but be hard to apparently drag down the gasoline price. The biggest driving force for higher gasoline price is the worldwide fundamentals.

Surging gasoline price was affected by higher oil price and also provided support to oil price in contrast in terms of demand. The traditional peak driving season in the United States, marked by Memorial Day, began fully after the end of May, and demand is expected to strengthen further.

In general, from the angle of fundamentals, OPEC+ ignored the demand to increase production and continued to maintain its original plan, and the United States relaxed sanctions on Venezuela, but because Venezuela's own capacity could not increase due to capital and other factors. United States' own capacity was also impacted by capital. Iran's nuclear talks were still in a stalemate, while the speculation of demand expectations during the summer trip that began to rise in the second half of May began to dominate the market, making the contradiction between supply and demand sharper. As for the macro sector, the impact of the Fed's interest rate landing on the market has been gradually digested, as can be seen from the recent sharp rebound in US stocks, and at the same time, the spread of epidemic has gradually improved, leading to further increases in demand expectations. The conflict between Russia and Ukraine has further escalated. The two bulls of the EU's ban on Russian crude oil and summer travel have not yet been reflected at the data level, which should be concerned later.