In the past three years, we have witnessed the zigzag trend of the oil price cycle. We have experienced negative oil prices beyond recognition due to the impact of the epidemic to the second-highest level in history of US$139/barrel caused by the Russia-Ukraine conflict. By the end of 2022, we will wait until the end of 2022. The price has returned to the position not far before the outbreak, just like reincarnation, the rhythm is very clear, but the investors who are involved must not feel like this. The situation we are facing now is completely different from the scene at the end of 2019.
The crude oil market will be very lively in 2022! The European energy crisis triggered by the Russia-Ukraine conflict in the first half of the year, especially the tight supply in the refined oil market, caused oil prices to fluctuate violently at high levels. Many investment banks even actively sang that oil prices would reach US$200 per barrel. However, the situation took a turn for the worse after July, and the Federal Reserve sharply raised interest rates. Under this situation, the economic recession and continued lower-than-expected demand have become the core driving force for the continued decline of oil prices from high levels. We barely have enough time to stop and think, and oil prices keep jumping and changing under one influencing factor after another. Various factors such as the Russia-Ukraine conflict, Western sanctions, the Federal Reserve’s record rate of interest rate hikes, and adjustments to OPEC+ production reduction plans are exerting an influence on oil prices. All this can be fully reflected in the constantly changing and adjusted balance sheets of major institutions. Because it is difficult to predict the specific operating rhythm of oil prices, the increasing difficulty of transactions has forced more and more investors to stay on the sidelines. Brent and U.S. WTI crude oil Open interest has returned to the level in 2015, setting a new low in seven years.
The picture shows the trend of oil prices from 2020 to 2022
Looking back on 2022, macro factors, geographical factors, supply and demand in the crude oil market have all exerted a huge influence on oil prices, with oil prices fluctuating as much as 60% during the year. In the first half of the year, the overall trend was an upward trend, from a gradual climb to an accelerated upward trend, and then a second peak after falling back; in the second half of the year, the overall trend was dominated by a rebound from highs and wide oscillations. Specifically:
Oil prices continued to rise in the first quarter. The recovery of demand in the post-epidemic era coupled with the emergence of supply problems in various regions has pushed oil prices up slowly. In late February, after Russia announced a special military operation against Ukraine, the geopolitical situation tightened. The outbreak of the Russia-Ukraine conflict and subsequent Western sanctions on Russia caused huge changes in the supply side. The market was worried about Russian oil supply and risk aversion was rising rapidly. This boosted crude oil prices until the Brent contract rose to $139.13 per barrel on March 7. Although investors later realized that they had overreacted, and the reduction in Russian oil supply due to sanctions was far less than what the market expected at the beginning of the incident, oil prices still experienced violent fluctuations, reaching the second highest point in the history of oil prices, and then the supply decreased. Oil prices fell sharply again after falling far below market expectations.
In the second quarter, with the gradual escalation of European and American sanctions on Russia, the EU discussed and determined an embargo on Russian oil, and geopolitical factors once again pushed oil prices up. At the same time, the start of the summer travel season in Europe and the United States and the improvement of demand in China in May have begun to become the core engine of oil price fluctuations. First, the European diesel crisis in the first half of the year triggered widespread market concerns, and the recovery of market demand in Europe and the United States at this stage has continued to ferment this anxiety. The cracking gap of refined oil products in the European and American markets has set a historical record. The crude oil processing gross profit in the European and American markets once exceeded 60 US dollars/barrel, far exceeding market perception. This is almost 3-5 times that of normal years. In order to alleviate this pressure, the United States and The International Energy Agency carried out a record-breaking 240 million barrels of strategic crude oil launch plan at the end of June. In hindsight, this strategic crude oil launch will be recorded in history. It has alleviated the pressure of tight supply and played a role in cooling the oil market.
Oil prices continued to fall in the third quarter. Russia’s expectations for a production cut failed, and Rosneft shifted its crude oil export target from the West to the East through discounts and changes in exporting countries. At the same time, macro factors resonated. Against the background of high oil prices leading to high inflation, European and American central banks entered a tightening cycle and began to raise interest rates significantly. Overseas economies fell back, demand weakened, and supply-side concerns cooled down. High oil prices suppressed consumption, and various Large institutions have been continuously lowering their demand expectations for 2022 since July. In the end, the recovery of crude oil market demand in 2022 was generally about 1 million barrels per day lower than expected at the beginning of the year, and the cracking gap of refined oil products began to fall from its high level. Domestic crude oil prices were stronger than international oil prices in the third quarter. The main reasons are: first, the exchange rate of the RMB against the US dollar fell; second, crude oil imports decreased in the third quarter; third, crude oil warehouse receipt inventories on domestic exchanges were at low levels.
In the fourth quarter, oil prices once again experienced a transition from optimism to pessimism, oscillating in a wide range. On October 5, the OPEC+ ministerial meeting decided to reduce total oil production by an average of 2 million barrels per day, which is the largest production reduction plan since the outbreak of the epidemic in 2020. The decision to hedge against weakening demand quickly boosted oil prices. However, after November, oil prices once again saw a round of decline in global crude oil led by Chinese crude oil. Weak demand became an important reason for the collapse of oil prices at the end of the year. Crude oil once completely gave up its highest 60% increase during the year and hit a new annual low in early December. , this is a result that is difficult to predict in the first half of the year.
The picture shows the 2022 Brent crude oil futures contract
As China’s epidemic prevention policy is further optimized in early December 2022, this means that Chinese demand is expected to once again become the core engine of the future. On the one hand, demand is expected to recover further, but from a global economic perspective, the risk of economic recession will become an important test for the financial market in 2023. It is also a huge challenge for crude oil. Due to economic downward pressure, the EIA has already reduced crude oil market demand in 2023. Growth expectations have been significantly reduced by nearly 500,000 barrels per day from two months ago, and crude oil market demand is expected to grow by 1 million barrels per day in 2023. The supply side is also facing the impact of many factors, including OPEC+ production cuts, the Russia-Ukraine conflict, and the Russian energy sanctions game. 2023 is destined to be a year of more variables for the crude oil market, and the market will still be in an unstable state.
In 2023, the energy market will gradually emerge from the panic of supply cuts and enter a state of rebalancing after supply reduction. The geopolitical influence dominated by the Russia-Ukraine conflict has receded, and risk premiums have been basically squeezed out of the market. However, due to the fragility of the supply side, demand recovery faces challenges, and there are still many changes in the supply and demand levels of the crude oil market.
At the December 2022 meeting, OPEC+ announced that the 2 million barrel production reduction plan will be extended until the end of 2023. Recently, Russian Deputy Prime Minister Novak said that as a response, Russia may cut its oil production by 5% to 7% in early 2023, about 500,000 to 700,000 barrels per day, in response to Western oil price ceiling measures. Russia plans to ban The United States delivers oil and petroleum products to countries that require oil price caps in contracts. The United States is subject to long-term capital expenditure shortfalls and has reduced its production growth. Its backfilling of strategic crude oil reserves will also be a variable that the market pays attention to. The supply of Libya, Nigeria and other countries is unstable. There are still many uncertainties about Iran’s return. Generally speaking, the low elasticity of crude oil supply may provide bottom support. On the demand side, there are both good and bad news. The downward pressure on the global economy has lowered the market’s expectations for demand recovery. The IMF World Economic Outlook has lowered the global economic growth rate by 0.2 percentage points to 2.7% in 2023. For the crude oil market demand growth expectations in 2023, the United States The EIA has made significant cuts for two consecutive months, from 1.48 million barrels per day to 1 million barrels per day. On the premise that there is still room for recovery in demand, such expectations are obviously extremely pessimistic. The Chinese market, the world’s largest crude oil importer, has given the market room for imagination on the demand side, which means that market expectations are at a low level by the end of 2022, and there may be better-than-expected performance in the future.
Taken together, under the background that there is still great elasticity in supply and demand, oil prices are likely to remain highly volatile in 2023. We predict that the central axis of oil prices in 2023 will be in the range of 80-90 US dollars/barrel, and the fluctuation range will be 70-110 US dollars/barrel. interval. If the demand side grows faster than expected, or the supply side risks increase, it will support oil prices above $90 per barrel.
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