Crude oil

Crude oil: Biden's victory will have a profound impact on the oil market

As of last week, Biden has won 290 electoral votes and is determined to win the election of the US president. However, the Democrats still have very little hope of turning over the Senate (the Republicans still control 50 seats), which makes the election result basically biased towards the president. The power structure of Biden + Republican Senate + Democrat House of Representatives will have a profound impact on the oil market.

It will be reflected in the following aspects:

Biden’s economic policies and anti-epidemic policies: Biden is expected to reach a new fiscal stimulus bill with Congress. However, since Congress is likely to be controlled by the two parties separately, it is difficult to achieve a fiscal stimulus of $2 trillion. The current market size is expected to be between 50 and 80 million US dollars. Reaching the fiscal stimulus bill agreement will help accelerate the recovery of the US economy, but it is weaker than the impact of the "Democratic sweep" election, which means that economic growth and inflation will be a weak recovery, and the expected depreciation of the dollar will be weak. Therefore, from the perspective of economic policy, it is still positive for risky assets including crude oil, but compared with the previously expected result "Democratic sweep" the election, the positive impact is weaker. Looking at the Covid-19 prevention policy, the current situation in the United States is severe. Compared with Trump’s anti-epidemic policy, Biden’s anti-epidemic policy will be more active. It is not ruled out that measures will be taken to restart the lockdown. If Biden re-closes the city after he takes office, the short-term economic growth and recovery of oil consumption will be negative.

Biden’s policy on domestic oil production: Biden proposed in the election to ban the issuance of new drilling permits and hydraulic fracturing on federal land (removal of tax incentives and subsidies for shale oil companies, etc.). Currently, it is not available and not sure whether this policy can be passed in Congress, there is a high probability that the Republican Party (the traditional warehouse ticket of oil companies) will not be supported. This policy will affect shale oil drilling and extraction on federal land and wells that have been drilled but not yet completed (According to Platts’ calculations, if this policy is strictly implemented, it is estimated that by the end of 2022, the U.S. crude oil production will reach 400,000 barrels per day. Therefore, Biden is prohibited from working in the federal government. Land drilling and hydraulic fracturing will have a profound impact on the future U.S. oil production pattern, making it difficult for the already hit shale oil industry to regroup.

Biden’s foreign policy: It is expected that Biden will rejoin the Iran nuclear agreement (a political legacy during the Obama era) with a high probability, which will lead to the release of the 2 million barrels/day of production capacity currently affected by Iran’s sanctions, since the implementation of this policy does not require the approval of the Congress. We believe that the implementation is more likely to occur, but the time is currently uncertain. It is expected to be in the second half of next year in the earliest. In addition, the relationship between the United States and Venezuela may also be eased, and easing sanctions on Venezuela means in the future crude oil production and exports will gradually recover, but still depend on the introduction of Biden's relevant policies. At present, the relaxation of sanctions with Venezuela is not a priority for Biden, but the probability of sanctions relaxation has increased significantly. In addition, the cancellation of the China-US trade war will have a great impact on the oil market. On the one hand, the macro sentiment is positive. On the other hand, the end of the US trade war means that China will no longer charge tariffs on imports of US crude oil, and the cost of China's import of US crude oil will be dropped, this will help increase China’s imports from the United States.

Strategy: Neutral.

Iron Ore

Iron Ore

On November 6, 2020, the position on I2101 contract increased by 30,000 and closed at ¥819.5per ton, the position on I2105 contract decreased by 2069 and closed at ¥751.0 per ton, the spread of Iron 1-5 contract is 68.5. In terms of spot, the PB powder in Rizhao Port was ¥841 per ton, BRBF price was equivalent to ¥902 per ton, the best delivery Karara was equivalent to ¥860 per ton. Some have low prices.

【Important Information】

1. Mysteel: According to data from General Administration of Customs on November 7, 2020, China imported 10.742 million tons of iron ore and a decrease of 1.805 million tons from the previous month and a year-on-year increase of 14.9%; The cumulative volume of ore and concentrated iron imports from January to October were 97.520 million tons, an increase of 11.2% year-on-year.

【Trading Strategy】

1. Arbitrage: Currently, the demand exceeds the expectations. At present, the demand exceeds the expectations. Downstream continue to destock the inventory, and the destocking rate has increased compared with last week. The overall demand performance is relatively strong, which has certain support for molten iron output. In terms of valuation, the basis of iron ore began to be narrowed in November. The gap continues to decrease. it is suggested to short on 01 iron ore while long 05 iron ore for hedging.

2. Option strategy: It is advised to hold the short position on i2101-C-870 and hold the short position on i2102-P-800. (For reference only)

PTA

PTA: Xinfengming’s new production has landed, and polyester production and sales continue to be weak

In October we will continue to estimate the de-stocking, follow up by the implementation of the overhaul and the continuity of demand improvement. There is an expectation of rigid accumulation in November and December.

In terms of the unilateral strategy, it is advised to be neutral; for the strategy across varieties, the current TA pattern is long in short-term and short in long-term, in late October, there is a chance to continue the rebound; in addition, the accumulated warehouse concerns from November to December followed by the peak of seasonal terminal loaded, and the rebound gives space for varieties allocation; for strategy across period, it is advised to focus on the reverse cash and carry strategy opportunity after the next round of TA overhauls fulfilling and rebound of 1-5 spread. It is advised to focus on PTA factory inspection and fulfillment wishes, and the downstream restocking space and improvement of demand.

Natural Rubber

Rubber: The price of raw materials fell sharply, and rubber prices dropped significantly

The price of rubber continued to decline last week. The high price attracted a significant increase in the production of raw materials from the main producing areas. The weakening of the market atmosphere brought about a sharp drop in the prices of raw materials, which led to a significant decline in spot prices, resulting in a weaker basis.

The total inventory of domestic exchanges as of November 7 was 253,537 tons (+5627), and the amount of futures warehouse receipts was 225,000 tons (+3970). The weather in domestic production areas recovered, and high prices attracted a significant increase in warehouse receipts last week. According to Longzhong's statistics, as of November 1, the stocks in the bonded zone have rebounded slightly, and the stocks outside the zone have fallen slightly. The increase in outgoing goods has brought the total inventory down slightly last week, but the absolute value is still high compare with the previous years.

The spot market price dropped sharply last week. According to Zhuo Chuang's understanding, the current decline in raw materials has led to a price decline in the market. The production of concentrated latex in the early stage has returned to dry rubber production and delivery. However, most of the terminal factories chose to wait and see under the declining market and a few factories choose to buy at a low price, the overall trading atmosphere is on the sidelines, and the transaction volume is normal. The quotation of US dollar latex in Qingdao Free Trade Zone fell, mainly driven by the decline of Shanghai latex, coupled with the loosening of the market, short position increased. It has been learned from the market that the number of orders and shipments have increased, the buying prices have been significantly reduced, and the overall transaction volume is average. The price of the international market was high and the price of raw materials in Thailand was normal. The price of latex fell sharply during the week. The overall decline was significant. In addition, the futures market was affected by the long profit and liquidation. The price for US dollar latex shifted, but due to the strong holding atmosphere in domestic market, the overall transaction volume was general, and only a small amount of purchases maintained the normal inventory levels. As of last weekend, the rubber premium was 2500 yuan/ton (-1625) for synthetic rubber. With the sharp drop in rubber prices, the price gap narrowed significantly last week.

In terms of downstream tire operating rate, as of November 6, the operating rate of steel tire companies was 75.39% (+0.09%), and the operating rate of semi-steel tire companies was 71.23% (+0.22%). The peak season of domestic demand and the slow recovery of overseas demand have brought the operating rate to maintain at a high level. It is suggested to pay attention to the impact of the second outbreak of the European epidemic on tire exports.

Viewpoint: Last week, under the influence of the recovery of production in the main producing areas in domestic and overseas and the impact of macro policy, the price of raw materials fell sharply, resulting in a significant decline in spot prices and a sharp drop in futures prices. In November, we mainly focused on the short-term pressure on the spot rubber market due to the cancellation of old rubber warehouse receipts brought about by the expiration of the 2011 contract. The prices rose too fast, and with the adjustment last week, they have basically returned to a rational level. From a fundamental point of view, due to the sharp rise in raw material prices, the amount of raw materials in the domestic Yunnan production area has increased, and the increase in the profit of latex will stimulate the increase in rubber production in a short time. However, due to the limited time for tapping, the increase may be limited. The domestic demand side is still showing a good momentum. The sales of heavy truck continued to improve in October. The increase in car sales is expected to be maintained until the end of the year. Supply and demand will not change much. It is expected that the price decline is expected to slow down next week, and wait for the price stabilization of the raw material.

Strategy: Neutral

Risk points: Increased supply has brought stocks back up sharply, Covid-19 and others affect the demand continues to be weak, and the balance of funds is tight.