Although the supply side of the oil market is still tight, dragged down by factors such as concerns about economic recession and the strengthening of the US dollar, Brent crude oil and WTI crude oil fell below the US$100 mark again on July 12, marking the second time in the past week that they have exceeded US$100. “.
The key logic behind this is that slower economic growth will drag down demand. According to the latest monthly report released by OPEC on the 12th, global oil demand growth is expected to slow down to 2.7 million barrels per day in 2023 from 3.4 million barrels per day in 2022. On July 13, the International Energy Agency (IEA) also released its monthly report, lowering its forecast for global oil demand growth this year by 240,000 barrels per day and its 2023 forecast by 280,000 barrels per day.
But whether it is this year or next year, although demand growth slows down, actual demand continues to grow, but at a smaller rate.
OPEC’s monthly report shows that the tension in the oil market has not completely eased. Global crude oil demand is expected to increase by 2.7 million barrels/day year-on-year in 2023 to 103 million barrels/day, while supply outside OPEC will only increase by 1.7 million barrels/day. This means that OPEC will need to increase production by 1 million barrels per day in 2023 to match supply and demand. In addition, the IEA predicts that global crude oil demand will increase from 99.2 million barrels per day this year to 101.3 million barrels per day in 2023.
In addition, supply-side issues have not been resolved. Although OPEC increased production in June, changing the situation of declining production in May, total production is still far below the target.
Judging from various signs, oil prices still have solid fundamental support. International oil prices have rebounded again on July 13.
Supply and demand remain tight
In May this year, OPEC production declined instead of increasing, with oil production falling by 176,000 barrels per day, far from reaching the growth target stipulated in the OPEC+ agreement.
By June, OPEC production finally grew again, but it was still well below target. According to OPEC’s latest monthly report, the total output of all 13 member countries increased by 234,000 barrels per day in June to 28.72 million barrels per day. Three of them, Iran, Venezuela and Libya, are not subject to OPEC’s production quotas. . In addition, the total output of the 10 OPEC members participating in the production increase plan rose to 24.81 million barrels per day in June, but it was still about 1.06 million barrels lower than the target of 25.87 million barrels per day.
If the time frame is expanded, OPEC+ oil-producing countries have supplied more than 500 million barrels of oil to the global market in the past two years even less than their committed levels.
The demand side remains relatively strong. OPEC predicts that total global demand will reach 103 million barrels per day in 2023. To balance supply and demand, OPEC needs to produce an average of 30.1 million barrels per day of oil in 2023, which is 1.38 million barrels per day higher than June production capacity. To fill this gap, OPEC needs to significantly increase production, but it has been plagued by insufficient investment, political instability and other factors.
The IEA also pointed out that although high oil prices have reduced oil consumption in OECD countries, demand in developing countries has rebounded. The IEA predicts that oil demand will increase by 2.1 million barrels per day in 2023 to 101.3 million barrels per day, driven by strong demand growth in non-OECD countries.
On the other hand, due to sanctions triggered by the Russia-Ukraine conflict, it is difficult for Russia’s large oil supply to enter the Western market, and the market urgently needs new oil supplies to fill the supply gap.
Against this background, U.S. President Biden’s trip to the Middle East this week is particularly worthy of attention. High energy prices have exacerbated domestic inflation in the United States. As the midterm elections approach, Biden urgently needs to calm inflation to restore public sentiment. From July 13 to 16, Biden will visit Israel, the West Bank and Saudi Arabia.
It should be noted that Saudi Arabia and the United Arab Emirates are the only two OPEC members with large amounts of spare capacity. Official data shows that the two countries currently have about 3 million barrels per day of idle production capacity.
But whether Biden’s visit can achieve actual results remains a big question mark. Ben Cahill, a senior fellow at the Center for Strategic and International Studies, said: “A surge in Saudi production seems unlikely, and Saudi Arabia is expected to make some innocuous announcements, such as pledging to help balance the global oil market, meet global demand, support economic growth and protect importing countries. Stablize.”
Zhang Zhuran, chief researcher of Qilian Cloud, told reporters that from the perspective of practical interests, OPEC naturally does not want the bull market of crude oil to end prematurely. Moreover, many countries in OPEC are currently repairing relations with the United States and Europe quickly due to energy factors, so crude oil prices remain high. An important bargaining chip in its negotiations with the United States and Europe.
Are market worries overdone?
Although the risk of economic recession will indeed suppress demand to a certain extent, overall, the fundamentals of the oil market are still strong, and oil prices may be expected to rebound after the recent sharp correction.
Goldman Sachs said the oil sell-off was “overdone” given the unresolved global oil supply gap. While the possibility of a recession is certainly rising, it would be premature for the oil market to give in to such concerns.
A senior crude oil analyst at a large futures company told reporters that summer is when demand in the northern hemisphere is strongest, and demand from the United States, Europe, and China will support crude oil prices. From a seasonal perspective, demand will fall back after the summer.
On the other hand, insufficient investment has become a huge problem on the supply side of the oil market, and this problem is not expected to be solved in the short term. UAE Energy Minister Suhail Al-Mazrouei warned that if the world does not have more��Investment, OPEC+ cannot guarantee sufficient oil supply as demand fully recovers from the epidemic. If Russian oil and gas exit the market entirely, prices could reach levels far beyond expectations.
BlackRock, the world’s largest asset management company, also said that as Western countries try to reduce their energy dependence on Russia and investment fails to keep up with growing energy demand, oil prices will remain high. Amid the prospect of tight supplies in the coming decades, energy commodity prices are likely to be underpinned by growing demand, with energy consumption in emerging markets set to grow significantly in line with rising living standards.
Although U.S. government officials have held meetings with U.S. oil and gas industry giants to urge the latter to ensure energy supply, the response from energy companies has not been positive.
Constrained by supply chain issues, capital discipline, climate policy and many other factors, Scott Sheffield, CEO of Pioneer Natural Resources, the largest shale oil producer in the United States, said that the company’s oil and gas production growth rate will only remain at 5% per year, and it is impossible to increase the growth rate. “We will say no to the Biden administration,” even after the Biden administration asked them to increase production.
This also means that under the wave of energy transformation, the traditional energy industry still has a lot of room for development, which can also explain why Buffett continues to add positions in energy giants such as Occidental Petroleum.
In Zhang Zhuran’s view, Buffett’s unique vision lies in not overinvesting in the global new energy industry, and still favors traditional energy companies such as oil companies. Burshire’s ESG indicators are actually not as good as many American companies.
Although the S&P 500 energy sector has experienced a recent correction, it has still increased by more than 20% this year, which is in sharp contrast to the U.S. stock market that has fallen into a bear market. Marko Kolanovic, chief global market strategist at J.P. Morgan, remains bullish on the energy sector, noting that despite rising prices, energy stocks are actually trading at lower price-to-earnings ratios than a year ago due to faster earnings growth.
Huang Senwei, a senior market strategist at AllianceBernstein, told reporters that in the short term, energy stocks do have correction pressure. This year’s gains have been huge. The market’s focus is gradually turning to economic recession, which will affect the demand for commodities such as oil. .
But in the long term, Huang Senwei believes that the valuation of energy stocks is still relatively low relative to the entire market. In the process of energy transition, the world still needs traditional fossil energy. And from the perspective of supply and demand, investment in the energy industry is still insufficient. Even if demand slows down in the future, production capacity still cannot meet demand.
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