In the future, supply and demand may be weak Crude oil prices remain high

The EU foreign ministers' meeting was held in Brussels on May 16, and due to Hungary's opposition, the meeting failed to agree on the adoption of the sixth round of sanctions proposals, including the embargo on Russian oil, but international crude oil prices are still rising slightly and
continuously.
At present, international crude oil oscillates at a high level, but geopolitical factors will aggravate the volatility of crude oil prices
.
On the one hand, from the perspective of supply, OPEC and US shale oil producers have not increased production due to high oil prices and high profits, while Russian crude oil exports have not declined much in the short term, but in the medium term, the downward trend of exports is difficult to reverse
.
On the other hand, the epidemic and high inflation have led to a general slowdown in the global economy in the second quarter, and consumption growth will also slow down
.
At present, institutions including OPEC and EIA have lowered their crude oil demand growth forecasts
for the second quarter and 2022.
In addition, the Fed's current monetary tightening to curb inflation will continue, or even increase, which will further dampen economic growth and crude oil consumption
.
Therefore, although the supply of crude oil is still tight, it is difficult to break through the previous highs
.

Crude oil supply is still not available

From the supply side, in April, Russian crude oil production fell significantly
.
According to the Russian Fuel and Energy Integrated Survey Agency (CDU-TEK), Russia's crude oil production averaged 1.
436 million mt per day, equivalent to 10.
52 million barrels per day, from April 1 to 6, down 4.
5% from 11.
01 million b/d in March and the largest decline
in nearly two years.
The IEA expects Russia to lose 160 b/d of capacity in May, rising further to 2 million b/d in June; If sanctions against Russia are escalated, lost capacity will rise to nearly 3 million b/d
from July.

In terms of exports, Russian crude oil exports in April increased by 620,000 b/d from March to 8.
1 million b/d
.
The EU remains the largest market for Russian oil, with 43% of oil exports going to the EU
.
Western sanctions have not completely prevented global customers from buying Russian crude oil, but the procurement process has been more complicated by the sanctions, which require the purchase of Russian crude oil
by converting foreign currency into rubles.
Russian crude oil exports fell in May, according to Bloomberg, the volume transported through the Transneft network, the world's largest oil pipeline network operator, Russia's crude oil exports in the first half of May were 608,600 b/d, down 4.
1%
from April.

The picture shows OPEC crude oil production

In terms of OPEC, the increase in production is facing a bottleneck, and OPEC is not willing to increase production
significantly.
On May 5, the OPEC+ meeting decided to increase production slightly next month, increasing production by only 432,000 b/d in June, continuing to ignore calls from major oil consumers, led by the United States, to increase production to weigh on oil prices
.
OPEC's monthly report showed that in April, OPEC members' implementation rate of the OPEC+ joint production cut agreement reached 162%, and OPEC's total production reduction in the month was 851,000 b/d
more than the joint production cut request.

The market is closely watching whether the next OPEC meeting, on June 2, can reach an agreement
to increase production.
Investors can use the CME Group OPEC Watch tool (OPEC Watch) to get an up-to-date look at the expected outcome of
the meeting before the meeting.
The OPEC Watch Tool uses the CME Group WTI crude oil option price to calculate the probability of an OPEC meeting achieving a certain outcome, that is, based on the performance of weekly and monthly options expiring before and after the meeting
.

OPEC+ insisted that it was not responsible for supply disruptions caused by geopolitical conflicts, and was more worried about weak demand caused by the resurgence of the epidemic, insisting that "supply and demand fundamentals and prospects are basically balanced", without discussing Western sanctions
against Russia at all.
OPEC Secretary-General Barkindo said that other producers are unlikely to replace Russia's exports of more than 7 million barrels per day, and that "spare capacity does not exist at all", as if to refute the US mentioned that OPEC powers such as Saudi Arabia and the United Arab Emirates have the ability to increase production in excess of quantities
.

In the United States, shale oil producers also seem unwilling to increase production, not only did not start work day and night under the government's call, but even allowed production to decline; Capital investment is also far from being comparable
to the last time oil prices exceeded 100 hours.
Instead of continuing to invest to boost supply after reaping the huge profits from oil prices, oil majors tend to pay cash to shareholders through dividends and share
buybacks.
According to energy research firm Rystad Energy, operators will generate $180 billion in free cash flow
this year at current crude oil prices.
While the number of rigs has increased in recent months, it has been dominated by private companies, while energy majors have been less willing to increase production, with 11.
8 million barrels per day still below the pre-pandemic peak
of 13 million barrels.

Demand growth is also slowing

On the one hand, from the perspective of overseas markets, despite the relaxation of epidemic control, but the slowdown of economic growth, especially high inflation in Europe and the United States and other countries to curb residents' consumer spending, the upcoming summer self-driving tour in the United States may be reduced
due to high gasoline prices.
According to foreign media reports, U.
S.
gasoline futures exceeded $4 per gallon for the first time ever, and the national average gasoline retail price rose to a record high
.
The data shows that indicators such as US real estate sales and manufacturing output (manufacturing PMI) in April all point to a slowdown
in the US economy.

On the other hand, the consumption of crude oil at the industrial level is likely to slow.

In April, China's crude oil imports increased by 6.
6% year-on-year, but refined oil imports fell sharply by 24.
4%
year-on-year.
This means that the year-on-year growth rate of crude oil imports in April may be caused by concentrated arrivals in Hong Kong, and the reduction in refinery operating rates in April due to the impact of the epidemic indicates that it is not due to strong demand, so it is difficult for China's crude oil imports to maintain high growth
in May.

OPEC's monthly report in May said global crude demand will rise by 3.
36 million b/d this year from last year, down more than 300,000 b/d
from the 3.
67 million b/d forecast in the April report.
Growth is expected to fall to 2.
8 million b/d
in the second quarter from 5.
2 million b/d in the first quarter.
The IEA's monthly report also revised down crude oil demand, with global crude oil demand growth in 2022 slowing down to 2.
22 million b/d from 2.
42 million b/d
previously.

As the last rising variety in the commodity cycle, crude oil often reflects the inflection point
of economic prosperity.
From the perspective of the global economy, the future will gradually move from "inflation" to "stagnation", and the demand for commodities, including crude oil, is not very optimistic
.
However, due to constraints on the supply side of most commodities, such as geopolitics, the epidemic or carbon emission policies, it is difficult for crude oil to fall sharply in the short term, but the rally will also slow down due to shrinking demand, and it is expected to show a high oscillation trend
.
Investors can hedge against high oil prices
using CME Group's WTI Crude Oil Futures Contract (ticker: CL) and the previous Energy Crude Oil futures.