Currently, international oil prices are only one step away from the $100 mark, and the last time the price reached this level was back in August 2014. With the shale oil revolution in the past few years, many people may not have thought that they would see oil prices of over 100 yuan in their lifetime. However, this “counterattack of old energy” came so suddenly.
As of 18:30 on February 7, Beijing time, the price of WTI New York crude oil was reported at 91.06 US dollars/barrel, and the price of Brent crude oil was reported at 92.45 US dollars/barrel. Compared with the low price after the oil price plummeted when the Omicron outbreak occurred in November last year, It has risen by nearly 35%, and there is no sign of stopping the rise – demand has recovered after the epidemic in European and American countries, disputes between Russia and Ukraine, inventories and idle production capacity are at historical lows (geopolitical conflicts have impacted supply, and upstream operations in previous years have Insufficient investment) and OPEC+’s limited capacity to expand production. These factors have caused management funds to continue to increase oil prices, and the proportion of their crude oil shorts and longs has dropped to 16%.
Most futures traders interviewed by reporters believe that oil prices are expected to exceed US$100 in the first and second quarters. Goldman Sachs recently warned that the core basis for bullish oil prices is that the two key buffers (inventories and spare capacity) are at historically low levels. By summer, OECD inventories may fall to the lowest level since 2000, and OPEC+ idle production capacity will also drop to a record low of 1.2 million barrels per day. Six precedents since 1990 show that the lack of elasticity of supply requires forward contract prices to rise by 25% to 100% to achieve the effect of destroying demand and rebalancing supply and demand.
Regarding the reason why shale oil production capacity has not increased rapidly in recent years, Ren Xue, a crude oil analyst at Ping An Futures, previously told reporters that the amount of debt accumulated since the shale oil revolution is relatively large, and the pressure to repay has hindered the expansion of capital expenditures. It is expected that as the Federal Reserve scales back its bond purchases, the cost of bond financing for shale oil companies will also increase. In addition, under the background of mid- to long-term global carbon neutrality, international oil companies are gradually transforming to new energy sources. Even if independent listed shale oil companies maintain current production practices, they are still facing the problem of losing investment attractiveness. Future companies under the new energy policy of Biden in the United States It will gradually become more difficult to obtain mining licenses, and various factors will limit the expansion of capital expenditures of shale oil companies, resulting in a relatively slow recovery of shale oil production.
The crude oil supply gap has expanded significantly
During the Spring Festival, the number of new confirmed cases in major European and American countries fell, and the number of hospitalizations and severe cases in the United States and the United Kingdom continued to decline. Countries have successively introduced measures to unblock crude oil demand, boosting expectations for crude oil demand. At the same time, Russia-Ukraine geopolitical relations continued to be tense, and the northeastern United States encountered blizzard weather, which jointly pushed international oil prices to exceed US$92.
Low inventories and declining idle production capacity are driving forces for oil prices that cannot be ignored. JPMorgan Chase predicted at the beginning of the year that OPEC’s idle production capacity would decrease this year, thereby pushing up the risk premium of oil prices. The agency expects oil prices to rise to $125 a barrel this year and $150 a barrel in 2023. “We are seeing a growing recognition by the market of insufficient investment in global supply.” The bank said that assuming production is calculated according to current quotas, OPEC’s idle production capacity will fall from 13% in the third quarter of 2021 to the fourth quarter of 2022. to 4% of total production capacity.
The combination of insufficient investment by OPEC+ oil-producing countries and rising oil demand after the epidemic may lead to a potential energy crisis. The agency expects demand to return to pre-epidemic levels in the second half of 2022. Given that global refining profits remain high, refineries are encouraged to increase operating rates, and crude oil spot purchases are strongly willing. On the other hand, as idle production capacity declines, OPEC+’s ability to stabilize the crude oil market is constantly weakening, although OPEC is still sticking to its monthly plan Increase production by 400,000 barrels per day.
Fu Xiao, head of commodity market strategy at Bank of China International, told reporters that some OPEC members are unable to increase production due to insufficient upstream investment. According to the International Energy Agency (IEA), OPEC+ crude oil production rose by only 190,000 barrels per day in December. Among them, Russia’s crude oil production in December last year remained unchanged month-on-month at 10.9 million barrels per day, mainly due to the decline in oil field production of Rosneft. The Russian Energy Minister predicts that the country’s output will return to pre-epidemic levels in April and May this year.
“But we expect it may be postponed to the second half of the year. There are few new oil fields discovered in Russia, and they are basically old oil fields. The production of many old oil fields has reached a plateau period or even entered a declining period, and investment needs to be increased to maintain production. Stable, this will take some time to be reflected in production, resulting in Russia’s current idle production capacity being relatively tight.” She said that OPEC members are also facing similar problems, and it is expected that OPEC’s idle production capacity will drop to 230 by December 2022. million barrels per day, far lower than the 7.1 million barrels per day in March last year.
Coincidentally, Goldman Sachs also warned that supply imbalances have historically ended with rising oil prices, destroying demand and bringing supply back into balance.
Goldman Sachs CommoditiesDamien Courvalin, director of energy strategy, mentioned that by summer, OECD inventories will fall to the lowest level since 2000, while OPEC+’s spare capacity will also drop to a record low of 1.2 million barrels per day. What is happening is that consumers trying to secure physical supplies will first push backwardation higher, at which point the unwinding of producer hedging and consumer forward buying behavior will cause long-dated futures prices to move higher. Normalizing future inventories and spare capacity through a combination of demand destruction and increased supply.
Rising prices in forward contracts have historically been caused by a lack of supply. For example, Goldman Sachs said that in 1999/2000, 2004/2005 and 2007/2008, the lack of elasticity of supply required a 100% increase in long-term prices to suppress demand. However, in 2018, given the high supply elasticity of shale oil, rebalancing only required a 25% increase (when oil prices rose to $85/barrel), and US production growth reached 2.1 million barrels/day at the end of the same year. peak. Goldman Sachs predicts that the rebalancing from 2022 to 2023 will be between the above two ranges, requiring sufficient rise in oil prices to both increase shale oil production growth (currently low elasticity) and slow down global oil demand growth.
Geopolitical risks push oil prices higher
It cannot be ignored that geopolitical risks are the catalyst for rising oil prices.
Invesco Asia Pacific global market strategist Zhao Yaoting told reporters that if the Ukrainian issue escalates into a local war, global oil supply will be greatly affected. In this scenario, an expected decline in oil supply of 2.3 million barrels per day would push oil prices to almost double to around $150 per barrel, reducing global GDP by 1.6%.
Fu Xiao told reporters that Russian crude oil exported to Europe mainly passes through the Druzhba oil pipeline, with a pipeline transmission capacity of 1.4 million barrels per day. If the crisis in Ukraine further intensifies and develops into a local war, the southern line of Druzhba risks closure.
“In an extreme case, Russian oil exports may be disrupted. But we think it will mainly affect crude oil exports from western Russia, that is, exports through Europe, which is about 2.2 million barrels per day. Due to insufficient OPEC+ spare capacity and limited U.S. export capacity, It is difficult to find substitutes for Russian crude oil in the market, and the global oil market will be in an extremely tight supply situation. At that time, oil prices are expected to exceed US$120,” Fu Xiao said.
Local war is not a high probability event, but this uncertainty coincides with rising crude oil demand and insufficient idle production capacity, which will undoubtedly greatly increase crude oil volatility. At present, managed funds are also constantly increasing oil prices, and their proportion of crude oil shorts and longs has dropped to 16%, which is the lowest level since mid-October last year. At the same time, some traders also mentioned to reporters that frequent supply interruptions have deepened the forward discount structure (stronger near-end prices), and the monthly profits of bulls have become stronger, providing further support for oil prices.
High oil prices make it harder to fight the “inflation tiger”
High oil price expectations may make it more difficult for the central bank to fight the “inflation tiger” this time.
This week, U.S. CPI data will be released soon, and traders will be alert and pay attention to clues about whether the Federal Reserve will raise interest rates by 25 basis points (bp) or 50bp in March. “If the CPI is stronger than the expected 7.3%, the Fed may have reason to raise interest rates by 50 basis points in March.” Joe Perry, senior analyst at Gain Capital Group, told reporters. In December last year, U.S. inflation reached 7%, a 40-year high. Currently, Goldman Sachs predicts that the Federal Reserve will raise interest rates five times throughout the year, and quantitative tightening (QT) will begin in the second half of the year.
The impact of rising oil prices on the upstream and downstream oil industries has also attracted much attention. Generally speaking, companies with upstream oil and gas resources will benefit significantly from this continued rise in oil prices. For example, the three largest oil companies (PetroChina, Sinopec, and China National Offshore Oil Corporation, among which CNOOC has the largest proportion of upstream business and has benefited most significantly), as well as some private enterprises with oil and gas field assets, such as Guanghui Energy, etc.
Huatai Futures said that taking PetroChina as an example, the gross profit of its exploration and production segment basically shows a highly converging trend with the price of crude oil. Through simple calculation, the correlation coefficient between the two from 2011 to 2020 can be as high as 0.98. However, there is no obvious correlation between crude oil prices and refining gross profits. It has even been calculated that the correlation coefficient of Sinopec over the past 10 years is -0.86, which is obviously contrary to our intuitive understanding. But if we divide the extremely high oil price range (above 80 US dollars/barrel) into several points, we can see that when the oil price is in the normal range of 40 to 80 US dollars/barrel, there is a certain positive relationship between refining profits and oil prices. Correlation (0.52); when the oil price is above US$80/barrel, there is an obvious negative correlation (-0.48) between oil price and refining gross profit.
Fluctuations in oil prices also have varying degrees of impact on the chemical industry. In the first half of 2021, the petrochemical industry’s return rate was nearly 12%, outperforming the entire market and ranking 30th among 109 secondary sub-sectors. “For example, varieties such as asphalt fuel will directly follow the decline in oil prices, but varieties such as methanol and ethylene glycol containing other raw materials will have more diverse influencing factors.” A futures trader told reporters. In addition, petrochemicals and coal chemicals are considered to be substitutable, so rising oil prices are often more beneficial to coal chemicals.
The factors are more diverse. “A futures trader mentioned to reporters. In addition, petrochemicals and coal chemicals are considered substitutable, so rising oil prices are often more beneficial to coal chemicals.
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