Crude oil

Oil prices fell sharply last week. Our previous bearish market logic basically fulfilled, but from the point of view of the trigger factors, the main reason is that the number of infections in Europe has risen again in early September, which has triggered market concerns about the second outbreak of the epidemic. In addition, the recent US stock market correction and the rebound in US dollar is also the macro background of this round of oil price correction. At present, the core concern of the market is still demand. Although the impact of the epidemic on demand is unlikely to be a recurrence in the second quarter (a cliff-like decline in demand), even a small-scale lockdown or a small decline in demand caused by regulation will affect the current oil market. The impact will still be very large, so the market is worried about the recurrence of the market in the second quarter, mainly because the fundamentals and the second quarter have undergone great changes, and several unconventional market balance methods are difficult to reproduce, mainly from the following aspects: 1. Overbought in China will not recur. Although the Brent oil is below $40/barrel, the production profit of the refinery will be repaired under the domestic floor price, but the crude oil inventory caused by the overbought in the early stage is still in the digestion stage, and domestic finished products inventories are close to the edge of the expansion, and the current low oil price domestic refineries may give priority to digesting the early low-price crude oil inventories rather than greatly increasing speculative oil storage; 2. The policy space of the production restriction alliance, the production reduction efforts of the August production reduction alliance was roughly around 8.8 million barrels/day, although there is still room for another reduction in production compared to 9.7 million barrels/day, due to the current cheating in countries such as Iraq and Nigeria, the possibility of Saudi Arabia’s single reduction in production is currently not large. Therefore, compared with the second-quarter production limit alliance, the production reduction space is very limited. It mainly depends on Saudi Arabia’s willingness to reduce production. Although the current production limit alliance adopts a strategy of focusing on demand to control output, if demand turns down again, the production limit alliance is very difficult to deepen production reduction again. In this case, if non-OPEC countries need to reduce production, then oil prices need to penetrate the oil sands and the cash flow cost of shale oil to force producers to reduce production; 3. The current storage capacity tolerance In the first half of the year, the world accumulated nearly 1 billion barrels of crude oil. Although some inventories began to deplete in May (mainly in the US), the current global oil inventory is still at a historical high, and the current inventory tolerance is much smaller than the second quarter outbreak previously, once the oversupply storage capacity accumulates, even if there is no serious oversupply similar to the second quarter, as the current remaining storage space is much lower than before the outbreak of the second quarter, worries about the storage capacity limit will come back.

In general, we believe that in the context of the expected warming of the second outbreak of the epidemic, the current bottom of oil prices has two levels. The first level is the bottom of the production restriction alliance. We expect this bottom to be roughly US$35 to 40 per barrel (Brent oil), the market needs to see whether the limited production alliance still has the ability to organize a round of large-scale production reduction; the second level is the bottom of the production reduction after breaking through the cash flow costs of non-OPEC countries. This bottom position has passed the previous round. The oil price has been relatively clear after the test, which is roughly around US$20/barrel.

Strategy: Neutral and bearish relatively, reverse cash and carry arbitrage strategy on Brent, long the sixth lines and short the first line

Risk: Supply disruption caused by sudden geopolitical events. The dollar continues to depreciate sharply.

Iron Ore

The position on I2101 contract decreased by 708 lots and closed at ¥847 per ton, the position on I2105 contract increased by 15 lots and closed at ¥775.5 per ton.

【Important Information】

1. According to the Ministry of Ecology and Environment, as of September 10, the second round of the second batch of central ecological and environmental protection inspectors had accountable 21 party and government leaders. In the second round of the second batch of 7 central ecological and environmental protection inspection teams from August 30 to September 1, 2020, successively stationed in 3 provinces (cities) including Beijing, Tianjin, and Zhejiang, as well as China Aluminum Corporation and China National Building Material Two central enterprises including the Group Co., Ltd. conducted inspections, and pilot inspections were conducted for two departments including the National Energy Administration and the State Forestry and Grassland Administration. As of September 11, all inspection teams have entered the sinking work phase.

2. According to foreign media reports, data from the Peruvian Ministry of Mines and Energy shows that from January to July this year, Peru's total mining investment fell by 24.9% year-on-year. The total mining investment was US$2.27 billion, down from US$3.02 billion in the same period in 2019. Among them, the investment in mining equipment from January to July fell by 9% year-on-year, while the investment in the exploration and development sector fell by 38.8% year-on-year.

3. In terms of spot, the PB powder in Rizhao Port rebounded by ¥10 to ¥940 per ton.

【Trading Strategy】

1. Arbitrage: Recently, there has been a significant accumulation of iron ore in ports, and the inventory of sintered coarse powder, especially the Australian ore increased, the overall delivery of Australia and Pakistan was relatively high, and structural contradictions have improved. The trading volume of steels improved, and the iron ore rebounded significantly with a large discount. For 01 iron ore, it is recommended to wait and see. As to arbitrage strategy, the 1-5 reverse cash and carry arbitrage strategy is recommended.

2. Option strategy: It is advised to short i2101-C-950.

PTA

Polyester production and sales are still weak, waiting for follow-up maintenance

In September, it was the first time to realize destocking if all overhauls are fulfilled, but the absolute number of inventories will still be high after the destocking; in October, if the overhauls are slow, there will be an expectation of inventory accumulation, and if all the overhauls are fulfilled, the inventory will decrease in stage. In terms of the unilateral strategy, it is advised to be neutral; for the strategy across varieties, the high inventory problem has not been resolved yet, and it is not advised to maintain the strategy across varieties, but the willingness of the upstream factory to maintain and control should still be judged based on the change in processing fees; for strategy across period, the 1-5 cash and carry arbitrage strategy may rebound with TA overhauls, and after overhauls, the inventory accumulation expectation will return and it is advised to remain the 1-5 reverse cash and carry arbitrage strategy. It is advised to focus on PTA factory inspection and fulfillment wishes, and the downstream restocking space and improvement of demand.

Natural Rubber

RU: The main force contract of RU01 rose by 15 or 0.12% and closed at 12,225. The main force contract of JRU02 fell by 3.8 or 2.11% and closed at 176.5. Yunnan WF closed at 11,400 to 11,450 yuan per ton, Hainan SCRWF closed at 11,550 to 11,600 yuan per ton, the secondary standard rubber closed at 10,500 per ton, and Thailand’s RSS3 closed at 15,200 to 15,700 yuan per ton.

NR: The main force contract of NR11 rose by 35 or 0.38% and closed at 9,225. The main force contract of TF12 fell by 0.3 or 0.22% closed at 134.0. The quoted price for Qingdao rubber in USD fluctuated. The CIF of STR20 in December was $1,435 to $1,440 per ton. The CIF of SMR20 was $1,380 to $1,395 per ton. The CIF of mixed rubber from Thailand in December was $1,395 to $1,405 per ton.

TireWorld News: On September 9, Taiwan's leading tire company Zhengxin Rubber disclosed its August data. That month, the company's revenue was NT$9.394 billion (approximately RMB 2.193 billion yuan), a year-on-year increase of 1.2% and a month-on-month increase of 4.5%. This data is its single-month revenue record this year, and it has maintained growth for 4 consecutive months. In the first half of this year, the epidemic situation was severe, which impacted Zhengxin's performance. From January to August, the company's cumulative revenue was NT$60.028 billion (approximately RMB 14.01 billion yuan), a year-on-year decrease of 18.6%.

Thailand has received a lot of rain recently, and all major production provinces have observed heavy rains. The average daily rainfall in September rose to 11.98mm, and the cumulative rainfall in the three months increased by 63.2% year-on-year. The rainfall affected the local supply. The premium of latex to cup lump was 11.4 baht/kg, higher than the historical average of 4.6 baht/kg over the same period and the highest value of 9.5 baht/kg in the same period.

Futures Operation Advice: For the main RU01 contract, it is advised to hold a slight long position and set a stop at previous low level at 12,140. (For reference only).