Bears dominated crude oil under recession trading, and lower oil prices eased global inflationary pressures

Bears began to dominate commodity markets amid recession trading, and as of the evening of August 4, WTI crude had fallen below $90 a barrel for the first time since geopolitical conflict, a far cry
from the year's high of $130.

"With the OPEC+ latest production decision and the release of weekly crude oil inventory data in the United States, WTI crude oil rose first and then fell on the 3rd, and tested the 5-month low near
$91.
" Matt Weller, global research director at GAIN Group, told reporters, "With the breakdown, it may open up the space for consecutive declines to the support level of near the high of $85 in the fourth quarter of
last year.
" ”

Oil prices are closely linked
to inflation expectations.
Traders interviewed by reporters all said that the bulls and bears are still playing a fierce game, inflation trading may return in a few months, and the Fed's interest rate hike is far from over
.
But the current decline in crude oil is positive for growth stocks, and inflation expectations seem to have peaked, but will remain high
.

Crude oil bears have the upper hand

Weak PMI data for major economies in July has heightened recession fears, with oil prices falling nearly 5%
on Monday (August 1).

On the supply side, OPEC+ announced on Wednesday (3rd) that daily output in September increased by 100,000 barrels, in line
with market expectations for an increase of 100,000 barrels to 400,000 barrels.
But when quotas are put into real output, the figure may be only one-third, because the 100,000 barrels increase will be evenly distributed among member states, while only Saudi Arabia and the UAE have excess capacity
.
Weller said output quotas are not what prevents most OPEC+ countries from increasing production
.
Therefore, the increase in quotas will only have a limited impact on
market supply.

As production increases were actually lower than expected, WTI crude oil rose $3 and stood at one point at $
96.
But just a few hours later, the U.
S.
released weekly crude oil inventories, with inventories unexpectedly increasing by 4.
467 million barrels and expected to decrease by 629,000 barrels
.
The data showed weak U.
S.
gasoline consumption, and crude oil inventories rose more than expected amid fears of a global recession, with crude oil imports hitting a two-year high
.
Traders were caught off guard as crude oil prices gave back early gains, slipping all the way down and testing a 5-month low near
$91.
As of 21:30 Beijing time on the 4th, WTI crude oil fell below $90 / barrel at $89.
80 / barrel, and Brent crude oil was quoted at $95.
65 / barrel
.

In late July, oil prices continued to rebound towards the $110 mark
as the prospect of banning crude oil imports from major producers in Europe boosted oil prices, and affected by Saudi Arabia's inability to continue to increase crude oil production and peak summer travel.
However, with the Fed revealing signals to slow the pace of rate hikes and market fears of a recession have intensified, recession trading has continued to dominate
in the near future.

Fu Xiao, head of commodity market strategy at BOCI, told reporters that according to official information from OPEC member Libya, the country's daily crude oil output has risen to 1.
2 million barrels, and the last time it reached such a level was in April
.
In Europe, the S&P global manufacturing PMI in July was all below 50
.
On top of that, the new order sub-indicator of the US ISM Manufacturing PMI fell from 49.
2 to 48, further weakening overall crude oil demand
.

In addition, in order to moderate the rise in oil prices, the United States began to release the Strategic Crude Oil Reserve (SPR)
earlier.
While the release of the SPR will be replenished at some point in the future, it may be postponed until fiscal year 2023 (June 30, 2023), which will also put pressure
on oil prices.

In the CFTC's (U.
S.
Commodity Futures Trading Commission) reported last week, speculators have lowered their crude oil net long positions by 37,000 lots to 355,000 lots
.
Among them, the net position of the WTI crude oil fund in New York fell by 12,500 lots, mainly due to the liquidation of long positions, and the market lowered its expectations
for short-term demand for US crude oil.
However, fund managers raised Brent crude oil, possibly because of the recovery in refining profits and the persistence
of tight spot supply of crude oil.

In the coming week, the bull-short game is likely to keep oil prices more volatile
.
Fu Xiao believes that the crude oil spot premium and forward discount structure show that the spot supply is still tight, which supports the price of crude oil; On the other hand, fears of a recession could limit the rise in
oil prices.

Inflation expectations or highs have peaked

As oil prices fell, inflation expectations began to moderate
.
Most institutions expect the US CPI to peak and fall back this year, but it will remain at a high level
.

Year-over-year prices for new cars, transportation services, furniture, nonprofit services and hotels in the U.
S.
are currently much higher than usual, driven
by supply constraints, a rebound in demand, and a baseline effect.
Specifically, the auction price of used cars rose by 0.
6% in the first half of July, 42% higher than the pre-epidemic level; Goldman Sachs' housing inflation-tracking index edged up 0.
1 percentage points to 6.
8 percent in June; Rising agricultural prices will drive food prices up about 10%
in 2022.

In addition, supply chain disruptions, as measured in supplier lead times, improved in July, but remained high
.
Supply bottlenecks pushed core PCE inflation up 65 basis points (BP) year-over-year in June, a contribution that Goldman Sachs expects to decline to 20BP in 2022 and is expected to decline
further in 2023.
The agency believes that inflation in the United States will be 5.
9% in 2022, driven by the base effect, falling back to 2.
6% in 2023 and 2.
3%
in 2024, respectively.

The latest data show that the real GDP growth rate of the United States in the second quarter was converted into a decline of 0.
9% per annum, which is lower than the market expectation of growth of 1.
3%, and the GDP decline for two consecutive quarters seems to meet the definition
of a technical recession.
But because the unemployment rate remains historically low, it still cannot be called a real recession
.

In terms of sub-items, commodity consumption, inventory, and residential investment are the main drag items, and the three together cause a drag of 3.
8 percentage points on real GDP
.
Government spending is also shrinking (federal -3.
2%, state and local -1.
2%)
.

It can be said that the technical recession of the United States is the "pot"
of inventory.
The United States is currently in the passive replenishment stage
of cooling demand and rising inventory.
Retailers made a big purchase last year in response to supply chain disruptions and surges in demand, and now the high-priced inventory piled up in warehouses is a liability
.
On the one hand, excess inventory erodes corporate profitability, on the other hand, it also affects manufacturing and production links, which has a broader impact on
the US economy.

Vanguard lowered its U.
S.
GDP growth forecast to about 1.
5 percent from around 3.
5 percent at the start of the year and estimated the probability of a recession in the next 12 months at 25 percent and 65 percent
in the next 24 months.
The economy is more
likely to sustain high inflation and stagnant growth for a certain period of time than the likelihood of an economic "soft landing," in which economic growth and unemployment are at a long-term equilibrium (about 2% growth and 4% unemployment).

As far as China is concerned, the inflationary pressure in the second half of the year comes from two aspects, one is imported inflation, including the maintenance of high energy prices, the food crisis, and the periodic depreciation of the exchange rate; The second is domestic inflation factors, including a new round of pig cycle, PPI to CPI conduction strengthened
.

Xie Yunliang, chief analyst of Cinda Securities Macro, told reporters that a new round of pig cycle will start in the third quarter, and the bottom of pig prices has passed
during the year.
As the economy climbs and demand repairs, PPI will strengthen transmission to CPI
.
"It is expected that the center will be about 2.
8% in the second half of the year, 2.
3% in the whole year, and the high point of the year will be about
3.
3%.
" However, the expectation that imported inflation is expected to moderate due to the current pullback in oil prices may limit the upside of China's CPI
.

Growth stocks are temporarily revelrying

On the one hand, the decline in oil prices has suppressed inflation expectations, and on the other hand, the process of aggressive interest rate hikes by the Federal Reserve may have slowed down, and growth stocks that have suffered a critical blow earlier have recently been in a state of jubilation
.

The Nasdaq 100 rebounded sharply by 12.
5 percent in the past month, leading all indexes, showing a recession in market trading as growth stocks tend to grow higher in the mild recession
.
In the first half of this year, the index retraced nearly 30% at one point, the worst trend
since the 1970s.

Yuan Yuwei, a senior global macro trader, told reporters: "The decline in crude oil is good for growth stocks, while cyclical stocks are weak
.
While it is not excluded that inflation trading will return in 3 to 6 months, it will be a mean reversion scenario within 3 months, and our system currently has bullish signals
for the S&P 500 and Nasdaq 100.
”

The data shows that the ARKK innovative ETF of Cathy Wood, which was hit by inflation trading earlier, has recently been revived with bloodshed, rising 6% in one day on Wednesday and more than 10%
in the past month.
"This fully reflects the full revival
of technology stocks.
" Yuan Yuwei told reporters
.

More institutions tend to take a neutral view rather than turn optimistic about risk assets across the board, as the Fed's rate hike process is far from over, and the current high inflation of 9.
1% is unlikely to provide a reasonable basis
for expectations of a rate cut next year.

At present, it is expected that the Fed's interest rate hike in September may drop from the previous 75BP to 50BP, and the interest rate hike of 25BP in November and
December will be the mainstay, but it is only a marginal easing.
At the beginning of this week, FOMC (Federal Reserve Board) members said they would continue to raise interest rates
.
Chicago Fed President Charles Evans said that if inflation did not improve, it was reasonable to assess that a 50BP rate hike should be raised in September, and a 75BP hike was also possible.
Mary Daly, a bank member of the Federal Reserve Bank of San Francisco, claims that the Fed's anti-inflation campaign is far from over; St.
Louis Fed President James Bullard also pointed out that to push inflation back strongly, interest rates need to be raised and interest rates
kept high for a long time.

"It is expected that in the future, the US economy will most likely move from stagflation to recession, that is, from the economic downturn and inflation upward to the accelerated economic downturn, inflation downward, and the economic inflection point may appear in the third quarter
.
" Wu Zhaoyin, director of macro strategy of AVIC Trust, told reporters that stagflation and recession correspond to the decline of stocks, and the current US stock market is about to fall to the halfway stage, and US bond yields may peak and fall in the second half of the
year.
U.
S.
stocks will change from "double killing of profit valuation" to "killing profits", but the probability will not continue to fall rapidly, but may turn into a negative decline
.