According to the Zheshang Securities research report released by the WiseNews app, influenced by the OPEC+ production cut agreement on June 2nd, crude oil prices experienced a significant drop on June 3rd, with Brent crude oil futures contract falling by 3.65% to $78.15 per barrel. Although the May ISM PMI data in the United States was lower than expected and finished oil inventories increased compared to the previous month until May 24th, the traditional peak season for crude oil demand is expected to gradually increase. Additionally, the core PCE in the United States dropped to a three-year low in April, with a YoY growth of 2.8%. Inflation is improving in the United States, strengthening expectations for a rate cut. Due to supply contraction and the peak season for demand, there are bullish expectations for crude oil prices in the mid-term, with the added factor of the anticipated interest rate cut by the United States.

Some clauses of the OPEC+ agreement have led to short-term bearish sentiment, but there is room for actual output regulation.

On June 2nd, OPEC+ officially agreed to extend voluntary production cuts of 2.2 million barrels per day to the end of September 2024. However, OPEC+ also stated that it would gradually cancel the voluntary production cuts between October 2024 and September 2025. The market worries that there is a possibility of gradually canceling the production cuts after the fourth quarter of this year, reversing the current tight supply situation, resulting in a significant drop in oil prices on June 3rd. However, Saudi Arabia also mentioned a supplementary statement during the meeting, stating that everything will be based on market conditions, and future plans to gradually cancel production cuts on a monthly basis may be reversed.

Zheshang Securities believes that Saudi Arabia has a desire to maintain high oil prices, and there is room for flexible regulation of actual production levels after the fourth quarter. As a dominant supplier of marginal changes in crude oil supply, OPEC+ has a relatively strong control over oil prices.

It is expected that OPEC+'s supply constraints will strengthen in the third quarter.

OPEC+'s further extension of the production cuts will effectively maintain the tight supply situation in the crude oil market. First, OPEC+ has a collective desire to maintain high oil prices. Currently, the oil prices around $80 per barrel are lower than the budgeted breakeven oil price of most OPEC+ member countries. At the operational level of production cuts to stabilize prices, Saudi Arabia, the largest production cut provider, can supplement its revenue through other means. Recently, Saudi Aramco launched the second stock issuance financing project that raised over $10 billion, which increases the flexibility for Saudi Arabia to adjust production cuts to stabilize prices in the future. Secondly, Iraq, Kazakhstan, and other countries have not strictly implemented the production cut agreement in the first half of the year, with daily production levels exceeding the specified quotas by several hundred thousand barrels. This meeting required Iraq, Russia, and Kazakhstan to further reduce their production to make up for the unfulfilled voluntary production cuts in the first half of the year and maintain the voluntary production cuts of 2.2 million barrels/day until September. Therefore, overall, the OPEC+ supply will continue to shrink over the next few months.

China National Offshore Oil Corporation (600938.SH), PetroChina (601857.SH), China Petroleum & Chemical Corporation (600028.SH), and Zhongman Petroleum and Natural Gas Group Corp., Ltd. (603619.SH), which has a high crude oil production capacity and significant growth potential, are recommended for attention due to their low valuations and high dividend yields.

Risk warnings: lower-than-expected crude oil demand, and OPEC+ increased production in the fourth quarter.

Risk Warning: Crude oil demand falls short of expectations, OPEC+ increases production in the fourth quarter.