Since December last year, international crude oil prices have started to rise again. On the one hand, the European energy crisis has boosted market expectations about the substitution of crude oil for natural gas consumption; on the other hand, against the backdrop of a slow recovery in global crude oil production, the market’s concerns about a drop in demand caused by the spread of Omicron have significantly cooled down.
Looking to the future, we believe that the rise in international crude oil prices may slow down. NYMEX’s WTI crude oil futures price may encounter obvious resistance when it rebounds to around US$80/barrel, while ICE’s Brent crude oil futures price is at the top relative to the WTI crude oil futures price. It may be slightly higher, and it will also encounter selling pressure in the range of 83-85 US dollars per barrel. The reason is that on the one hand, global crude oil supply is still recovering; on the other hand, crude oil demand in emerging markets represented by China will slowly decline under the impact of slowing economic growth, high oil prices, and the rapid development of new energy vehicles.
Global crude oil supply is slowly recovering
Looking back at November 2020 to November 2021, international crude oil prices have continued to rise for more than a year. This is driven by both the investment demand brought about by the loose liquidity of the US dollar and the slow recovery of the global economy from the epidemic. It is related to the rebound in demand, and it is also related to the slow recovery of global crude oil supply under the impact of the epidemic.
However, in the fourth quarter of 2021, we found that global crude oil supply was still recovering under the stimulation of high oil prices. Although the recovery speed is still relatively slow, the crude oil production of OPEC, the United States and Russia has basically returned to more than 80% of pre-epidemic production capacity. . Judging from the global supply and demand relationship before the epidemic, there was originally a surplus. Once the production capacity of major oil-producing countries returns to more than 90%, the tight global crude oil supply will be significantly alleviated.
According to data released by the U.S. Energy Information Administration, as of September 2021, global crude oil production increased by 6.1% year-on-year to 96.5982 million barrels/day, lower than 96.8775 million barrels/day in July and the second highest record since May 2020. However, there is still a big gap between the record high of 102 million barrels per day set in November 2018 before the epidemic.
OPEC crude oil production, which has a vital impact on global supply, is slowly recovering, but it is still far from the peak reached before the epidemic. According to data released by OPEC, as of November 2021, OPEC crude oil production has rebounded to 27.717 million barrels/day, a year-on-year increase of 10.4%, but it is still 5.73 million barrels/day short of the highest record of 33.447 million barrels/day set in September 2016. . This is mainly related to the sharp decline in production caused by sanctions on Iran and Venezuela, while the crude oil production of Angola and Algeria has not yet returned to peak levels due to insufficient investment and other reasons. With continued high oil prices, capital for crude oil exploration and production among OPEC members will begin to recover significantly. In addition, the production capacity of important OPEC members such as Saudi Arabia is far from reaching the upper limit. As of the end of November 2021, Saudi Arabia’s crude oil production was 9.867 million barrels per day, which still has a lot of room for growth from the peak record of 11.642 million barrels per day set in April 2020.
The picture shows the recovery of OPEC crude oil production
On January 4, the OPEC+ oil-producing alliance held its 24th ministerial meeting via video and agreed to continue to increase production by 400,000 barrels per day next month, thus resuming production that was stopped during the epidemic. This move is in line with general market expectations.
Judging from the situation in the United States, from 2017 to 2018, U.S. shale oil once dominated the global crude oil price and supply and demand pattern. Currently, U.S. shale oil production is also recovering, and there is still a lot of room for increase in production. Data from the U.S. Energy Information Administration shows that in the week of December 24, 2021, U.S. oil production increased by 200,000 barrels/day to 11.8 million barrels/day, a new high since May 2020, but still lower than January 2020. A record of 13 million barrels per day. From the perspective of monthly production, data released by the EIA show that in October 2021, U.S. crude oil production rebounded to 11.47 million barrels per day, a significant year-on-year increase of 10.2%, setting a record since October 2020, but it is still lower than in November 2019. It set a record high of 12.966 million barrels per day in May.
In Russia, there seems to be little room for production growth. According to preliminary statistics recently released by the CDU-TEK department under the Russian Ministry of Energy, Russia transported a total of 46.11 million tons of crude oil and condensate in December 2021. Based on a rough estimate of the conversion ratio of 7.33 barrels per ton of crude oil and condensate, this is equivalent to daily production of 10.903 million barrels, which is almost the same as the 10.89 million barrels per day in November 2021. Russia’s major oil producers said in November 2021 that as OPEC+ gradually relaxed restrictions on production, they have been increasing production and are now close to full capacity.
Global crude oil demand will peak and fall
In the short term, it seems that the market’s concerns about the demand for U.S. flights caused by the spread of Omicron have eased, but U.S. refined oil consumption is likely to have a significant downward trend in the fourth quarter of 2021 and the first quarter of 2022. According to statistics from airline data provider FlightAware, more than 3,100 flights in the United States were grounded on January 3, the largest number of groundings in a single day since February 2021. On January 2, 5,400 flights had been canceled, mainly due to a blizzard that hit some of the busiest airports in the United States from Seattle to Washington and a surge in confirmed cases among crew members.
Additionally, as Asia’s largestAs an oil consuming country, China’s oil demand is weakening. From the perspective of crude oil imports, from January to November 2021, China’s crude oil imports dropped to 46,700 tons, while in the same period in 2020, crude oil imports were as high as 50,400 tons. For other emerging markets, the Fed’s tightening may lead to capital outflows, investment declines and economic slowdowns. Countries with large consumption increases in emerging markets such as Brazil and India may also face the risk of cooling crude oil demand.
For Europe, the energy crisis may prompt Europe to “green light” nuclear power plants, which means that the role of crude oil in replacing natural gas consumption will eventually weaken. On December 31, 2021, a draft was submitted to EU governments for review. The draft mentions that if the toxic waste of nuclear energy can be properly processed without causing significant damage to the environment, it should be regarded as a sustainable economic activity; before 2045, new nuclear power plants can be regarded as green energy, and natural gas that meets certain emission conditions may be classified as a “transitional” energy source.
Tightening liquidity will drag down crude oil investment demand
For the crude oil market, it is actually difficult to calculate the gap between supply and demand. On the one hand, crude oil is affected by geopolitics and other factors, resulting in opaque strategic inventories. Strategic inventories can be released when necessary. On the other hand, crude oil as an investment product is also subject to speculation. Favored by capital, floating oil tankers at sea and private commercial inventories on land cannot be counted. However, judging from historical experience, the Fed’s monetary tightening, US dollar interest rates and exchange rates have both strengthened, and the space opportunities for crude oil prices to rise have been limited.
Therefore, we believe that it will be difficult for international crude oil to return to the historical high set in April 2011 despite more than a year of rising prices. At present, the supply of crude oil is slowly recovering, and the demand for crude oil is about to peak and fall. Coupled with the replacement of traditional fuel vehicles by new energy vehicles under the global energy transformation, the period of overall consumption being strongest is about to pass. Investors can consider using CME Group The newly launched micro WTI crude oil futures (product code: MCL) hedges the risk of crude oil rising and falling. Since July 2021, the cumulative trading volume of micro WTI crude oil futures has exceeded 5 million contracts. One of the reasons for the product’s popularity is that its contract size is smaller and more precise, allowing investors to more flexibly manage their positions and crude oil price exposure. From investment institutions to active small traders, everyone can use micro WTI crude oil futures contracts to directly participate in the global commodity market of crude oil.
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