Abstract
Based on the traditional supply and demand framework, if there is no sudden geopolitical impact, we believe that oil prices may not have the motivation to continue to rise during the year.
The depreciation of the US dollar has been an important driver of the rise in crude oil prices over the past year. Vaccination in developed economies is accelerating, changes in the economic gap between Europe and the United States have flattened, and the continued unilateral depreciation of the U.S. dollar will most likely not last, and support for oil prices has begun to weaken.
The derivatives market points to the peaking of oil prices, and the forward contract prices of crude oil futures at different points in time have transformed from premiums to deep discounts, indicating that “smart money” believes Oil prices have reached a peak and are likely to fall back in the medium term.
Crude oil inventories have begun to decline in the third quarter of last year. The crude oil market will remain relatively balanced in the future. The crude oil market pattern will gradually change from a supply and demand mismatch to a basic balance. The future crude oil price is uncertain. Sex comes more from the supply side. The main variable on the supply side comes from the fact that after the United States returns to the Iran Nuclear Agreement, Iranian crude oil will return to the international crude oil market, easing the tight supply of crude oil.
We believe that the impact of energy structure transformation on oil prices will be low in the short term.
In order to achieve carbon neutrality, the International Energy Agency recommends not only curbing oil consumption from the demand side, but also limiting oil extraction from the supply side. The current view of crude oil bulls points to the contraction of crude oil supply caused by administrative controls under the goal of carbon neutrality. However, we believe that oil is an important part of a country’s economy, military, and politics. Restrictions on the global oil and gas exploration industry will most likely cause various crude oil-producing countries to fall into a prisoner’s dilemma and be unable to achieve a true production reduction.
Crude oil is an important factor affecting the overall price level. If there is no room for growth during the year, it will support our baseline assumption that domestic inflation will fall during the year. Under this baseline scenario, corresponding to investment in A shares, TMT technology, military industry and high-end manufacturing may create better returns.
Text of the report
1. US dollars Depreciation is an important driver of rising crude oil prices
The traditional crude oil analysis framework involves macro factors, supply and demand factors, financial attributes, energy substitution and geopolitical factors, etc., in different economic cycles , the influencing factors of crude oil are also different. The influencing factors of long-term crude oil place more emphasis on the economic cycle and oil pricing power. Short- and medium-term oil prices are susceptible to the influence of supply and demand and geopolitical disturbances. Under the current influence of the global epidemic, the influencing factors of crude oil come more from the supply side.
Reviewing the crude oil price trend before and after the epidemic, since 2021, the price of Brent crude oil has increased by 40.15%, and the price of WTI crude oil has increased by 43.74%. Overall, international oil prices have gone through three stages since the beginning of 2020, with crude oil prices showing a “√” shaped trend.
In the first stage, from the beginning to May of 2020, the epidemic began to break out on a large scale around the world, and oil prices adjusted significantly. After March, the price of two barrels of oil once fell below US$50 per barrel.
In the second stage, the OPEC+ meeting in May 2020 reached an agreement on the scale of production cuts, and oil prices began to stabilize and recover.
The third stage, January 2021, due to the rise in the U.S. ten-year Treasury bond interest rate, market inflation expectations continue to rise, and the severe mismatch between oil supply and demand during the epidemic pushed oil prices further higher.
The depreciation of the US dollar will most likely not continue
The US dollar has depreciated significantly so far in 2020. Since crude oil is mostly used for export and is priced in US dollars, the depreciation of the US dollar has promoted the rebound of crude oil prices. The epidemic is the core variable in the current economic recovery. Since 2021, with the orderly advancement of vaccination in the United States, the United States has achieved great results in controlling the epidemic, and the U.S. economy has also begun a strong recovery. Since the second quarter, vaccination in Europe has accelerated, and the economic gap between the United States and Europe has begun to narrow. As an indicator of investors’ optimism about the economy, the Sentix Investment Confidence Index’s difference between the United States and Europe has historically been strongly correlated with the trend of the U.S. dollar index. As the epidemic in Europe improved, the difference has been for two consecutive months (May and June) narrowed. As vaccinations in the United States and Europe gradually approach the critical threshold of 75%, the impact of the epidemic on the economic gap between the United States and Europe may subside. Coupled with the hawkish signals released by the Federal Reserve, the logic of continued depreciation of the US dollar is difficult to continue, and it is difficult to continue to support oil prices.
2. The factors affecting future oil price trends are mainly pressure from the supply side
2.1 The impact of OPEC production cuts on oil prices
Under the influence of the epidemic, oil prices have begun to adjust since the first half of 2020. Due to concerns about demand-side disturbances, OPEC proposed in March 2020 that it hoped to stabilize oil prices through production cuts, but the negotiations eventually broke down and exacerbated the further decline in oil prices. Brent crude oil once fell below US$50 per barrel in March. The OPEC+ meeting in April once again reiterated the production reduction activities and reached an agreement. The 23 member countries launched the first round of production cuts starting from May 1, which lasted for two months. The scale of production reduction was 9.7 million barrels per day. Oil prices have increased since OPEC’s first round of production cuts. Start to pick up. OPEC will start the second phase in Julydrop.
We believe that the impact of the policies introduced by the world’s major economies to promote low-carbon green transformation on crude oil is more on the demand side, but will energy changes really affect oil in the short term? Demand is difficult to measure. A new report from the United Nations Environment Program (UNEP) states that 127 countries and regions have now made commitments to decarbonization goals. The European Union has always been a leader in advocating sustainable development and currently has legislative protection for the goal of carbon neutrality. On the contrary, the United States, Australia and Japan have been relatively neutral when facing decarbonization goals, adopting conservative strategies and unclear attitudes.
The “Carbon Neutral 2050” report released by the International Energy Agency (IEA) in May stated that it recommended that government departments stop approving new oil and gas exploration projects after 2021. This This means that the IEA recommends that policymakers not only curb oil demand from the demand side, such as emission limits and price taxes, but also recommend cutting off future oil supply from the supply side. The average time for traditional conventional crude oil projects from exploration to production to production is 6-10 years. Reducing the number of approved new oil and gas projects will significantly reduce future oil supply. Although this move is intended to promote the development of clean energy in the market by reducing oil supply and pushing up oil prices, we believe that restricting global oil and gas exploration is less feasible. Oil is an important part of a country’s economy, military, and politics. Restricting the global oil and gas exploration industry will most likely lead to a prisoner’s dilemma in various countries. As long as one party does not implement production restrictions, the share of the party restricting production will be reduced. Historical data shows that it is difficult for major crude oil producing countries to continue to achieve, implement and maintain production levels that are beneficial to oil prices.
OPEC and non-OPEC countries have begun to reduce production in succession to stabilize oil prices since 2016. However, despite this, countries such as Russia, Saudi Arabia, and Kazakhstan have still increased oil production. This means that it is difficult for major crude oil-producing countries to agree on a target for oil production amid competition from multiple parties such as economy, military, and trade. This further proves that completely cutting off oil supply from the source is not feasible for different policymakers, and efficiency is difficult to guarantee. Administrative order-style supply compression is likely to cause a prisoner’s dilemma in the oil market. It is difficult for global energy changes to have a major impact on global crude oil supply and demand in a short period of time, and the impact on oil prices is also at a low level.
Crude oil is an important factor affecting the overall price level. If there is no room for growth during the year, it will support our baseline assumption that domestic inflation will fall during the year. Under this baseline scenario, corresponding to investment in A shares, TMT technology, military industry and high-end manufacturing may create better returns. Technology and military industries are sensitive to interest rates and inflation, and the technology sector has continued to be suppressed by rising interest rates and inflation since July 2020; manufacturing is also sensitive to upstream costs, and the manufacturing industry has been under pressure since the PPI scissors between upstream and downstream profiles. A fall in inflation will significantly lift the suppressive factors in these sectors.
Risk warning: The U.S. dollar depreciates more than expected, and sudden geopolitical events occur in the Middle East</p
