Although the liquidity inflection point does not mean that commodities will plummet, from a liquidity perspective, the driving force for price increases is fading, and supply and demand factors will return to the stage. The crude oil market lacks the conditions to continue a large-scale bull market in 2022. Under the neutral baseline scenario, we judge that the center of gravity of oil prices in 2022 will shift downward compared to the second half of 2021.
Review of the crude oil market in 2021
The performance of the crude oil market in 2021 can be described as spectacular. On the one hand, against the background of loose liquidity, the overall commodity market rose sharply, and oil prices rebounded vigorously in the first half of the year. Although oil prices experienced a relatively large decline in the third quarter, the oil prices subsequently declined during the year under the influence of the energy crisis. The maximum increase once exceeded 70%. On the other hand, the world has experienced multiple rounds of COVID-19 epidemics in 2021, but global vaccination is also continuing to promote, and oil prices have fluctuated. At the end of November 2021, the Omicron mutant strain caused oil prices to plummet by more than 10 US dollars in a single day. The market was extremely volatile and pushed oil prices into their weakest phase in a year.
Looking back on this year, when market confidence was relatively fragile at the beginning of the year, Saudi Arabia stood up and united the production reduction alliance that was about to be loosened again. Saudi Arabia cut an additional 1 million barrels of production on the basis of OPEC+ production reductions, and adopted very cautious production. The return plan has injected strong confidence into the market. It can also be seen that as the supply tight situation continues, oil prices have climbed strongly to US$70 per barrel after withstanding the impact of the European epidemic in March and the Indian epidemic in May. Above, this is a position that the entire market did not dare to imagine at the end of 2020. It can be said that OPEC not only pushed up oil prices through very effective supply-side management in the first half of the year, but also won market recognition and contributed to stabilizing the crude oil market. Therefore, at this stage, almost no one questioned OPEC’s behavior. Moderate oil prices Rising prices will help the economy recover.
However, changes began to occur at the OPEC+ regular monthly meeting in July. The United Arab Emirates suddenly requested to increase its crude oil production benchmark. This request caused dissatisfaction with Saudi Arabia and triggered violent fluctuations in oil prices. Finally, the OPEC+ alliance reached an agreement through the mediation of other countries. The current production reduction agreement will still be implemented in accordance with the previous production baseline and production reduction plan, but it will also meet the UAE’s requirement to moderately increase its production baseline in the future. At the same time, OPEC+ has reached a new total oil production baseline, with an overall increase of 1.63 million barrels/barrel. will be implemented from May 2022. This meeting avoided the risk of OPEC+ breaking up again, but made the market realize that unity in the face of interests can only be temporary, and this increase in the production baseline also put pressure on crude oil market supply in 2022, shortly after , the Iraqi Oil Minister stated on behalf of the oil-producing countries that OPEC will usher in a battle for market share in the future.
After entering September, an unexpected hurricane “Ida”, the strongest in history, swept across the U.S. Gulf of Mexico, causing an unexpected reduction in U.S. crude oil production. The ensuing energy crisis pushed oil prices to the highest level during the year, with WTI crude oil hitting a record high It has reached a 7-year high, with Brent also exceeding US$86/barrel. China’s SC crude oil has also returned to above 500 yuan for the first time since the epidemic, close to 550 yuan/barrel; although the strong oil price has made oil-producing countries make a lot of money However, after experiencing a strong recovery in the first half of the year, the economies of various countries generally began to face deceleration pressure. At this time, the inflation caused by high oil prices began to bring severe tests. In the third quarter, the world’s major crude oil consuming countries such as the United States, India, and Japan began to One after another, OPEC+ was asked to consider from the perspective of global economic development, increase production and curb excessive oil prices. Faced with strong demands from consumer countries, Saudi Arabia and other OPEC oil-producing countries rejected this request at the November meeting and insisted on increasing production as planned, which aroused strong dissatisfaction from consumer countries. With inflationary pressure having to be controlled, the Biden administration in the United States must make a decision to control oil prices from an economic and political perspective, which has led to the most powerful joint strategic crude oil release plan in the history of crude oil. However, the subsequent emergence of the Omicron mutant strain caused oil prices to fall by US$20/barrel from their highs. Despite this, OPEC+ finally decided to continue to implement the 400,000 barrels/day production increase plan in January 2022, while the crude oil market was in the midst of the release of strategic crude oil. Against this backdrop, the new year also sees a renewed glut.
In addition, the crude oil futures of the Shanghai International Energy Trading Center have attracted a lot of attention since they were launched on March 26, 2018. In the past year, the Chinese version of crude oil futures has gradually grown under the spotlight. Up to now, the influence of Shanghai crude oil futures in the international market is increasing day by day. During the Asian trading hours, that is, during China’s daytime trading hours, the trading volume of Shanghai crude oil futures has steadily exceeded that of WTI and Brent. Even in the night trading in the United States During trading hours, Shanghai crude oil futures interact more and more frequently with international oil prices. At certain times, they have begun to lead the fluctuation of international oil prices in the crude oil market. More and more institutional investors include Shanghai crude oil futures as investment targets.
Over the years, the operation of Shanghai crude oil futures has also cultivated a large number of upstream and downstream customers in the crude oil industry, and promoted the understanding of my country’s crude oil industry that futures serve the real economy. According to reports, as of June 2021, 68 international brokerage companies have launched RMB crude oil trading services, attracting market participants from 25 countries and regions, including the United Kingdom, Switzerland, and the United Arab Emirates. Currently, a large number of Shanghai crude oil futures are exported��change.
Theoretically, tightening of monetary policy does not necessarily lead to a tightening of the global liquidity environment. Both the central bank’s monetary policy and the credit expansion of the real sector will have an impact on the global liquidity environment. However, as the economy further recovers in 2022, controlling inflation will become an important task that most governments need to face, and the gradual and orderly tightening of liquidity is the general trend. From a historical perspective, although the liquidity inflection point does not mean that commodities will plummet, from a liquidity perspective, the driving force for price increases is fading, and supply and demand factors will then return to the stage.
Renewed pressure of oversupply
In addition to the epidemic still plaguing the market, in 2021, energy transformation under the “double carbon” background has become an important factor affecting the market. The European energy crisis that began in the autumn of 2021 is largely due to challenges caused by supply shortages during the energy transformation process. Natural gas prices have risen sharply, indirectly pushing up oil prices.
Looking to the future, with the advancement of energy transformation, this mismatch of supply and demand may still occur frequently during the conversion process from traditional fossil energy to green energy, causing significant fluctuations in energy prices. The International Energy Agency (IEA) predicts that global crude oil demand growth will reach 3.3% in 2022, with an increase in demand of 3 million barrels to 4 million barrels per day, and the overall demand will return to the pre-epidemic level in 2019. According to the U.S. Energy Agency, global crude oil demand growth is expected to be 3.55 million barrels per day in 2022, which is 200,000 barrels higher than before. This shows that the recovery of crude oil market demand this year is still guaranteed.
At the OPEC monthly meeting in December 2021, it was decided to continue to maintain the 400,000 barrels/day production increase plan in January 2022. This decision surprised the market, because before this, under the scenario where the United States and multinational countries released a total of 66 million barrels of strategic crude oil reserves , OPEC+ predicts that the global market oil supply surplus will reach 3 million barrels per day in the first quarter. Under this circumstance, OPEC+ finally decided to continue to maintain the production increase plan. Currently, OPEC still has 3.4 million barrels of production reductions to resume in 2022. This production reduction cooperation After expiration at the end of April 2022, the OPEC+ crude oil production benchmark will increase by 1.63 million barrels per day compared with the current baseline, which means that OPEC+ has room to increase production by 5 million barrels in 2022. In addition, other non-OPEC countries will increase production by approximately 5 million barrels per day. Bringing an increase of 2 million barrels of supply. The potential supply increase in the crude oil market in 2022 is between 5 million barrels and 7 million barrels per day. However, we have also noticed that various investment banks, OPEC, IEA, etc. have warned that insufficient investment in the supply side may cause supply shortages. In this case Encouraged by oil prices returning to their highest level in nearly seven years, supply-side production increases are still relatively restrained. Generally speaking, resource-rich countries such as the United Arab Emirates, Iraq, and Iran have huge potential to increase crude oil production in the next few years.
The COVID-19 epidemic has been around for nearly two years, and we are still adapting to its impact on all aspects of life, from the economy to life. The same is true for the crude oil market. People are working hard to restore the market to normal order. However, under the impact of the epidemic and the “double carbon” background, the energy market will continue to be in the process of change. The market is increasingly worried that the supply of crude oil market may shrink faster than the demand for crude oil. Regarding the exit speed, we are not sure whether demand replacement or supply exit will lead in the energy transition process. Therefore, we cannot rule out the emergence of a continued oversupply situation. Energy prices will fluctuate greatly in the future, which will bring great challenges to the judgment of oil prices.
A large number of facts prove that people’s judgment on the direction of medium- and long-term changes in the supply and demand situation of the crude oil market is relatively more reliable. However, due to some uncontrollable factors, oil prices often lead to some unexpected performance. In the past year or so, many research institutions have continuously adjusted their forecasts. In the assessment of the oil market, the views of optimists and pessimists are still sharply opposed.
Based on a comprehensive assessment of macro factors and fundamental supply and demand interpretation, the crude oil market lacks the conditions to continue a bull market in 2022. Under the neutral baseline scenario, we judge that the center of gravity of oil prices in 2022 will shift downward compared to the second half of 2021, with Brent For example, the annual average price is roughly US$67/barrel, with a fluctuation range between US$55 and US$85/barrel; under a strong scenario, the center of gravity of crude oil is US$72/barrel, and under a weak scenario, the center of gravity of oil prices is close to US$60/barrel.
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