On September 11, Caixin Finance News reported that international oil prices have collapsed quite thoroughly...

On Tuesday, with Brent crude, a global benchmark, falling below $70, oil prices have reached their lowest level since December 2021. Compared to the peak in April this year, Brent crude has already fallen by more than 22%, officially entering a technical bear market.

In fact, what is more alarming to market participants than the sharp price drop may be the sentiment in the oil market.

Well-known financial blog website Zerohedge posted on X platform on Tuesday, suggesting that commodity prices are currently pricing in the hardest economic landing since the beginning of the century: the sentiment in the oil market is even worse than during the global financial crisis, the European sovereign debt crisis, and the peak of the global COVID-19 lockdown.

Looking at the position data, this alarming warning is not without reason. As shown in the chart below, the net long positions in crude oil held by hedge funds are currently at a historical low.

As energy expert John Kemp has calculated, in the seven days leading up to September 3, hedge funds and other fund managers sold the equivalent of 0.117 billion barrels of the six most important crude oil and refined oil futures and options contracts.

Note: The red line in the chart represents net position data.

Overall, the position has dropped to just 93 million barrels, the lowest level in at least a decade. Fund managers have almost completely sold off their positions, with changes in holdings including NYMEX and ICE WTI crude oil (-66 million barrels), Brent crude oil (-38 million barrels), European diesel (-9 million barrels), US diesel (-3 million barrels), and US gasoline (-1 million barrels).

Negative sentiment towards crude oil has quickly spread to refined fuels, with a strong bearish sentiment towards gasoline, especially diesel and other middle distillate oils.

Given that even after OPEC+ announced a two-month delay in implementing production increases, Brent oil prices still fell by about 10% last week, the current pessimistic sentiment in the oil market is evident. As a latest sign of weak demand, Saudi Arabia has also lowered the pricing of its flagship crude grade for major Asian markets.

From a supply-demand perspective, the potential slowdown in the global economy, including the United States, is not exactly new news. Many oil industry executives at the APPEC conference held in Singapore on Monday stated that China's oil demand growth has been slowing down due to the accelerating transition to electric vehicles and clean energy. In fact, Daan Struyven, head of oil research at Goldman Sachs, predicts that China's oil demand growth has already slowed to around 0.2 million barrels/day, compared to an annual growth rate of 0.5-0.6 million barrels/day in the five years before the COVID-19 outbreak.

Russell Hardy, CEO of Vitol Group, stated that China's shift towards electric vehicles will lead to an early peak in domestic gasoline demand this year or next year.

On the supply side, thanks to technological progress and efficiency improvements, US shale oil and gas production has increased by 30% in the past three years, almost offsetting OPEC's production cuts. This has further highlighted the pressure on oil prices from the prospect of slowing demand. With the Biden/Harris administration doing everything possible to keep commodity prices as low as possible before the election, actual gasoline prices are approaching historically low levels.

Note: The top graph shows US crude oil production, and the bottom graph shows OPEC crude oil production.

Looking at the volatility of oil prices this week, an interesting phenomenon is that Brent crude oil prices tend to experience a short-lived sell-off around 10 am Eastern Time (10 pm in Beijing).

In terms of the crude oil forward curve, the contango shape that was bullish 2-3 months ago has almost disappeared. The Brent crude oil 12-month price difference has fallen from $4 a month ago to $1, and the entire curve is rapidly shifting from a spot premium state to a futures premium state that is bearish.

Note: The trend of spot premiums, from top to bottom, is 3 months ago, 1 month ago, and now.

The volatility index of oil, OVX, has recently risen significantly, although it is still lower than the panic level in early August.

Note: The purple line above is the trend of oil prices, and the yellow line is the volatility.

A comparison shows that OVX, as the "fear index" of the oil market, is currently much higher than the "fear index" VIX of the US stock market.

And from the perspective of related markets, the current decline in oil prices seems to have implications for some other related assets and even decisions by the Federal Reserve. For example, oil prices have been closely correlated with the US dollar for quite some time (largely due to the fact that the US has transitioned from an oil-importing country to an exporting country), so does this mean that the US dollar will further decline?

Note: The yellow line represents oil prices, and the purple line represents the trend of the US dollar.

Meanwhile, as we mentioned earlier today, the decline in oil prices is also causing the US 10-year breakeven inflation rate to fall, which the Federal Reserve may have to face in the future as a risk of inflation getting too low...

If we put the oil price together with the yield of 10-year US Treasury Bonds, which is the anchor of global asset pricing, does the synchronized decline of the two imply that the Federal Reserve will accelerate interest rate cuts?

Finally, it is necessary to remind domestic stock investors that the oil price and the CSI 300 Index have been "close friends" for over a year, and this scene seems to be quite obvious recently...