In early June, international crude oil prices reached new highs. The July contract price of CME Group’s WTI crude oil futures once exceeded the US$120/barrel mark, while the price of ICE Brent crude oil futures also rose to above US$120/barrel. Currently, international energy issues are still the main focus of the world economy, especially the sanctions imposed by Europe and the United States on Russia due to the Russia-Ukraine conflict. As a result, the international crude oil market is facing a supply gap caused by the decline in Russian crude oil exports.
The picture shows the July contract of CME Group’s WTI crude oil futures exceeding $120/barrel
We believe that the current high crude oil prices are mainly caused by supply problems, and the outlook for crude oil demand is not optimistic.
Global economic growth is slowing down due to high inflation, and the possibility of recession is not even ruled out. After every energy crisis in history, the world economy has been in a state of turmoil, basically leading to economic recession in European and American economies. Therefore, in the short term, the crude oil supply gap will be difficult to make up, and oil prices will remain high; in the medium term, the global economy faces the risk of economic recession caused by high inflation, and oil prices will eventually fall again as economic growth slows down or the economy recedes.
The supply problem cannot be solved in the short term
In terms of production, according to data released by the U.S. Energy Information Administration (EIA), in April 2022, global crude oil supply was approximately 98.74 million barrels per day, of which OPEC crude oil supply was approximately 33.92 million barrels per day. The OPEC production increase that the market has been paying attention to finally arrived in June. On June 2, OPEC+ decided to speed up the increase in crude oil production and increase crude oil production by 648,000 barrels per day in July and August 2022 (an increase of 216,000 barrels from the original plan). /day).
However, from the perspective of OPEC members, only Saudi Arabia and Kuwait have spare production capacity to increase production, resulting in OPEC crude oil production increase not being very large. According to the resolution of the OPEC+ June meeting, Saudi Arabia will increase production by 114,000 barrels per day, 170,000 barrels per day and 170,000 barrels per day in the next three months. The UAE will increase production by 35,000 barrels per day, 52,000 barrels per day and 52,000 barrels per day in the next three months.
The picture shows OPEC and Saudi crude oil production
On the Russian side, as the conflict between Russia and Ukraine continues, sanctions imposed by Western countries on Russia are weakening Russia’s ability to increase crude oil production. After the EU announced a partial ban on Russian crude oil imports, some OPEC members are considering providing exemptions to Russia’s production targets. However, Russian crude oil production and exports will continue to shrink in the second half of the year. The International Energy Agency (IEA) estimated in its latest oil market report in May that Russia had shut down nearly 1 million barrels per day of supply in April. After supply fell by nearly 1 million barrels per day in April, the decline in Russian crude oil supply may widen to 3 million barrels per day in the second half of this year.
In the United States, according to data released by the EIA, as of the week of May 27, U.S. crude oil production was approximately 11.9 million barrels/day, compared with 10.8 million barrels/day in the same period last year; U.S. shale oil production has rebounded, but is still less than before the epidemic. There is still a gap of nearly 1.1 million barrels/day from the peak of 13 million barrels/day.
As of June 3, the number of U.S. crude oil rigs rose to 574, a significant recovery from the low of less than 200 hit after negative oil prices in 2020. The production capacity of shale oil wells is depleting rapidly, and increasing production depends on the expansion of the number of drilling wells. Therefore, the rebound in the number of U.S. crude oil rigs can also indicate that U.S. shale oil production has rebounded under the stimulation of high oil prices in 2022.
As for Iran, negotiations on the Iran nuclear deal have yet to come to fruition. On May 30, the International Atomic Energy Agency released a report stating that Iran’s enriched uranium stockpile is more than 18 times that stipulated in the Iran nuclear agreement. According to the Iran nuclear agreement reached in 2015, Iran promised to limit its nuclear program, including enriching uranium to no more than 3.67% and limiting its stockpile to 202.8 kilograms, in exchange for the lifting of sanctions by the international community.
In terms of inventories, the current commercial inventory reduction of U.S. crude oil is relatively obvious. In addition, some U.S. crude oil needs to be supplied to Europe, so U.S. crude oil supply is also shrinking. As of May 27, EIA crude oil inventory changes for the week actually decreased by 5.068 million barrels to 414.7 million barrels, which was expected to decrease by 1.35 million barrels, and the previous value decreased by 1.019 million barrels.
Demand outlook is not optimistic
From a demand perspective, the outlook for global crude oil demand is not optimistic. The current high global inflation and monetary tightening in major economies are causing the economic growth of major economies to slow down. Taking the United States as an example, the inflation-adjusted GDP of the United States shrank by 1.5% quarter-on-quarter in the first quarter, instead of the 1.4% contraction announced in the initial value, and lower than the expected contraction of 1.3%. Separately, the housing market has also cooled as mortgage rates climbed.
The peak driving season in the United States is about to begin, which may bring about an increase in gasoline consumption, but this year may be different. High oil prices are suppressing the consumption of American residents. According to data from the American Automobile Association, the national average gasoline price hit a new record of $4.865/gallon on June 6, a 60% increase from the $3.041/gallon in the same period last year. According to EIA data, after excluding the extreme situation of the COVID-19 epidemic in 2020, the four-week rolling level of U.S. gasoline demand in the week of May 27 has reached the lowest level in the same period since 2013. go withCompared with the same period last year, U.S. gasoline demand fell by about 5% year-on-year.
Demand in Asia currently looks positive, especially in China, which may bring about a certain rebound in refined oil consumption. However, high oil prices also restrict automobile travel. In April, China’s crude oil imports increased by only 6.6% year-on-year, while in February and March, they dropped significantly by 19.2% and 14% year-on-year respectively.
Therefore, we believe that in the short term, due to geopolitical factors, Russian crude oil supply is gradually being compressed in the global crude oil market, and OPEC crude oil remaining production capacity is not high, resulting in OPEC increasing production not being enough to make up for the supply gap caused by the decline in Russian crude oil exports. However, the demand outlook is also not optimistic. High inflation and monetary tightening are leading to a slowdown in world economic growth or even recession. Investors can consider buying CME Group’s newly launched micro WTI crude oil monthly call options (contract code: MCO) to hedge the risk of high oil prices. In the medium term, short orders in far-month crude oil futures (WTI crude oil futures or INE crude oil futures) can be properly placed and long-term micro WTI crude oil monthly put options can be purchased to hedge against losses caused by the peak and decline of high oil prices in the second half of the year.
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