On April 2, OPEC+, led by Saudi Arabia, unexpectedly announced a collective “voluntary” production cut. International crude oil prices surged sharply for a time. However, in the next two trading days, oil prices did not maintain their upward trend, but instead surged and fell. For the international crude oil market, the expected tightening of supply is good for crude oil prices. However, as global crude oil demand performed less than expected in the first quarter, and restricted by concerns about slowing economic growth in Europe and the United States and even recession, international crude oil inventories have continued to rise. This has It is unknown whether crude oil prices can continue to rise in the future. But what is certain is that the rise in crude oil prices has made it more difficult to control inflation in Europe and the United States, which may delay the tightening monetary policy cycle and lead to a further cooling of the European and American economies, which in turn will curb the rise in oil prices.
OPEC+ collective production cuts increase crude oil supply disruptions
This time OPEC+’s total production reduction is close to 1.65 million barrels per day, which will take effect from May and last until the end of 2023. In fact, in the first quarter of 2023, global crude oil production continued to fall, so OPEC+’s collective production cuts intensified the disruption to crude oil supply.
According to OPEC monthly report data, OPEC crude oil production increased by 1.49% year-on-year to 28.924 million barrels per day in February, and the growth rate continued to slow down. A monthly survey conducted by the media showed that compared with February, OPEC crude oil production decreased by 70,000 barrels per day in March due to the impact of production cuts in Iraq and Angola. The production of all 13 OPEC member states in March was 28.9 million barrels per day. . OPEC members subject to quotas fulfilled 173% of their production reduction commitments in March (169% in February); OPEC members subject to quotas produced 930,000 barrels per day less than the target in March (the figure in February was 88 million barrels/day).
The duration of Russia’s production cuts continues to extend. In February, Russia announced that it would reduce its crude oil production by 500,000 barrels per day in March in response to Western sanctions. Not long ago, Russia announced that it would extend this production cut until June this year. This time OPEC+ oil-producing countries unexpectedly announced a collective production cut, and Russia once again stated that it would extend the production reduction measures until the end of the year.
U.S. shale oil production is not expanding. Data show that the number of U.S. crude oil rigs has not grown significantly. Instead, it fell back to 592 as of March 31, after rising to 627 at the end of November last year. U.S. shale oil producers are unwilling to expand production due to rising shale oil extraction costs, falling oil prices and U.S. oil policy constraints. Instead, they use a large amount of oil profits for shareholder dividends and stock repurchases.
Judging from historical experience, most of the surge in crude oil prices was caused by the sharp reduction in oil supply triggered by geopolitical crises, and a few were caused by economic overheating and rising inflation. This was especially true during the period when OPEC had dominance over global crude oil prices. Obviously, for example, the three oil crises in the 20th century triggered skyrocketing crude oil prices.
In recent years, with the end of the U.S. crude oil production increase cycle brought about by the U.S. shale oil revolution, the U.S.’s influence on Middle East countries such as Saudi Arabia has declined. More and more countries have used other currencies to replace the U.S. dollar for international crude oil settlement. OPEC+ has regained international Pricing power in the crude oil market, supply disruptions have a very obvious effect on oil prices.
Demand is lower than expected, causing this round of production cuts to have limited boost to oil prices
Compared with last October’s production cut, the market seems to be much less controversial about this OPEC+ production cut because the current market supply situation is not as tight as before last October’s production cut. Before production cuts last October, OPEC+ oil inventories were 9.2% below the five-year average they tracked, and the latest report shows that inventories are currently only 2.9% below the five-year average they track. Global inventories reached their highest level since September 2021 in January and increased further in February.
Leading indicators of the U.S. economy continue to weaken, which means that the outlook for U.S. demand for crude oil is poor. Data released by ISM show that the U.S. ISM manufacturing index fell to 46.3 in March, a new low since May 2020. After excluding the factors of the new coronavirus epidemic, the ISM manufacturing index in the United States in March hit a new low since 2009. Among them, the new orders index was 44.3, compared with 47 in February; the new export orders index was 47.6, down 2.3 points from 49.9 in February. points, indicating that demand may weaken further in the future.
The economic slowdown in Europe and the United States has also put pressure on emerging markets, thus dragging down the demand for crude oil. From the perspective of crude oil imports, my country’s crude oil imports maintained high growth in February, with a year-on-year growth of 12.1%. The year-on-year growth rates in January and the same period last year were -11.2% and -19.2% respectively, and refined oil imports increased by 40.1% year-on-year. However, we expect that import growth may fall back in March.
OPEC+ crude oil production cuts may lead to extended monetary tightening by the Federal Reserve
Judging from U.S. inflation indicators, the growth rates of U.S. PCE and core PCE fell back in February, but energy and service price increases remained high. Data show that the U.S. PCE price index rose 5% year-on-year in February, lower than the previous value of 5.4%; the core PCE price index rose 4.6% year-on-year, lower than the previous value of 4.7%. Judging from the breakdown of data, the year-on-year increase in PCE prices in February was mainly affected by energy and service prices. Specifically, in February, commodity prices increased by 3.6% year-on-year, service prices increased by 5.7%, food prices increased by 9.7%, and energy prices increased by 5.1%.
As a result, high crude oil prices may stimulate stubborn inflation, making the anti-inflation task faced by European and American central banks, including the Federal Reserve, more complicated. April 2, St. LouisFederal Reserve Chairman Bullard said that OPEC+’s decision to cut production was unexpected and rising oil prices may make the Federal Reserve’s work of reducing inflation more challenging.
Although the U.S. banking crisis once triggered financial market expectations for an interest rate cut by the Federal Reserve, as the Fed’s concerns about inflation outweighed the financial market risks posed by the U.S. banking crisis, the Federal Reserve raised interest rates by 25 basis points as scheduled at its March meeting, making the benchmark The federal funds rate rose to the target range of 4.75%-5%.
If international crude oil prices rise sharply again in the future, the energy price growth rate in the U.S. inflation indicator may accelerate again, which means that the United States needs to further raise interest rates to curb rising inflation, which will cause the U.S. economy to face the risk of a hard landing, which in turn will curb The height of oil price increases.
To sum up, OPEC+’s collective production cuts have intensified the disruption of crude oil supply. Judging from historical experience, most of the surges in crude oil prices were caused by the sharp reduction in oil supply caused by geopolitical crises. However, demand was lower than expected, resulting in the short-lived boost to oil prices caused by this round of production cuts, and there is still uncertainty about the sustainability and height of crude oil’s rise. Investors can use CME Group’s WTI crude oil futures to manage the risk of violent fluctuations in crude oil prices. For example, overseas investors buy WTI crude oil futures contracts (CL), and domestic investors buy the previous energy crude oil futures contract (SC) to hedge potential rising risks. CME data shows that WTI crude oil futures remain the most liquid instrument in the crude oil sector, with more than 1 million contracts traded every day.
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