International oil prices exceeded $120 / barrel! Unsolvable supply shortage?

In early June, international crude oil prices reached a new high, among which the July contract price of CME Group's WTI crude oil futures briefly exceeded the $120/barrel mark, while the price of ICE Brent crude oil futures also rose above
$120/barrel.
At present, international energy issues are still the main focus of the world economy, especially the sanctions imposed by Europe and the United States on Russia under the Russian-Ukrainian conflict, resulting in the international crude oil market is facing a supply gap
caused by the decline in Russian crude oil exports.

The picture shows CME Group's WTI crude oil futures July contract breaking through $120 per barrel

In our view, the current high crude oil prices are mainly caused by supply issues, and the outlook for crude oil demand is not optimistic
.

Global economic growth is slowing amid high inflation, and a recession is not even ruled out
.
After every round of energy crisis in history, the world economy is a "chicken feather", which basically brings about a recession
in the European and American economies.
Therefore, in the short term, the crude oil supply gap is difficult to make up, and oil prices are high; In the medium term, the global economy faces the risk of recession caused by high inflation, and oil prices eventually fall
again as economic growth slows or recessions.

Supply problems cannot be solved in the short term

In terms of production, according to data released by the US Energy Information Administration (EIA), in April 2022, global crude oil supply was about 98.
74 million barrels per day, of which OPEC crude oil supply was about 33.
92 million barrels per day
.
The OPEC production increase that the market has been watching finally arrived in June, and on June 2, OPEC+ decided to accelerate the pace of crude oil production, increasing crude oil production by 648,000 b/d in July and August 2022 (216,000 b/d from the original plan).

However, from the perspective of OPEC members, only Saudi Arabia and Kuwait have spare capacity to increase production, resulting in a small increase in OPEC crude oil production
.
According to the resolution of the OPEC+ June meeting, Saudi Arabia will increase production by 114,000 b/d, 170,000 b/d and 170,000 b/d
per month in the next three months.
The UAE will increase production by 35,000 b/d, 52,000 b/d and 52,000 b/d
per month over the next three months.

The chart shows OPEC and Saudi crude oil production

On the Russian side, as the Russian-Ukrainian conflict continues, Western sanctions against Russia are weakening Russia's ability to
increase crude oil production.
After the European Union announced a partial ban on Russian crude imports, some OPEC members are considering providing exemptions
for Russia's production targets.
But Russia's crude production and exports will continue to shrink in the second half of the year, with the International Energy Agency (IEA) estimating in its latest oil market report for May that Russia had shut down nearly 1 million b/d of supply
in April.
After falling by nearly 1 million b/d in April, the decline in Russian crude supply could widen to 3 million b/d
in the second half of the year.

In the United States, according to data released by the EIA, US crude oil production in the week ended May 27 was about 11.
9 million barrels per day, compared with 10.
8 million barrels per day in the same period last year; U.
S.
shale oil production has rebounded, but is still nearly 1.
1 million b/d short of its pre-pandemic peak of
13 million b/d.

As of June 3, the number of U.
S.
crude oil rigs rose to 574, a clear recovery
from a low of less than 200 after negative oil prices in 2020.
Shale oil well capacity is depleting rapidly, and production increases depend on the expansion
of the number of wells.
Therefore, the recovery of the number of US crude oil rigs can also indicate that US shale oil production has rebounded under the stimulation of high oil prices in 2022
.

On the Iranian side, negotiations on the Iranian nuclear deal have been slow to come to fruition
.
On May 30, the International Atomic Energy Agency issued a report saying that Iran's stockpile of enriched uranium is more than
18 times that stipulated in the JCPOA.
Under the 2015 Iran nuclear deal, Iran promised to limit its nuclear program, including enriching uranium to 3.
67% and stockpiling a ceiling of 202.
8 kilograms, in exchange for the lifting of international sanctions
.

In terms of inventory, the current US crude oil commercial inventory is more obvious, coupled with some US crude oil needs to supply Europe, so US crude oil supply is also contracting
.
As of May 27, EIA crude oil inventory changes for the week actually decreased by 5.
068 million barrels to 414.
7 million barrels, down 1.
35 million barrels expected and 1.
019 million barrels
in the previous month.

The demand outlook is not optimistic

From the perspective of demand, the outlook for global crude oil demand is not optimistic
.
The current high global inflation and monetary tightening in major economies are slowing
economic growth in major economies.
In the United States, for example, inflation-adjusted GDP contracted by 1.
5% quarter-on-quarter in the first quarter, instead of the 1.
4% contraction announced in the preliminary value and also below expectations of 1.
3%.

In addition, the housing market has cooled due to rising mortgage rates
.

The peak driving season in the United States is about to begin, which may lead to an increase in gasoline consumption, but this year may not be the same, and high oil prices are suppressing consumption by US residents
.
On June 6, the average U.
S.
gasoline price hit a new record of $4.
865/gallon, up 60 percent
from $3.
041/gallon in the same period last year, according to the American Automobile Association.
According to EIA data, after excluding the extremes of the 2020 coronavirus pandemic, the four-week rolling level of gasoline demand in the United States in the week ended May 27 has reached the lowest level since 2013
.
U.
S.
gasoline demand fell about 5%
year-on-year compared to the same period last year.

Demand in Asia is currently positive, especially China may bring a certain recovery in refined oil consumption, but high oil prices also limit
car travel.
In April, China's crude oil imports rose only 6.
6% year-on-year, compared with a sharp decline of 19.
2% and 14%
year-on-year in February and March, respectively.

Therefore, we believe that in the short term, due to geopolitical factors, Russian crude oil supply is gradually compressed in the global crude oil market, and OPEC crude oil spare capacity is not high, resulting in OPEC production increase is not enough to make up for the supply gap
caused by the decline in Russian crude oil exports.
But the demand outlook is equally grim, with high inflation and monetary tightening leading to a slowdown or even recession in world growth
.
Investors may consider buying CME Group's new Micro WTI Crude Monthly Call Option (contract code: MCO) to hedge against
high oil prices.
In the medium term, short orders for far month crude oil futures (WTI crude oil futures or INE crude oil futures) and monthly put options for forward micro WTI crude oil can be appropriately arranged to hedge the losses
caused by the peak and decline of high oil prices in the second half of the year.