Many factors supported the sharp rise in international oil prices

●United Petrochemical Company Market Strategy Department

Since the beginning of the year, under the influence of the weakening of the Omicron strain, better than expected global oil demand, weak supply growth, intensified geopolitical turmoil in Russia and Ukraine, and snowstorms in the United States, international oil prices have shown a strong upward trend
.
On February 14, the price of Brent crude oil futures rose to $96.
48 / barrel, approaching the $100 / barrel mark; U.
S.
WTI futures rose to $95.
46 a barrel, the highest level since September 2014

Since the beginning of the year, under the influence of the weakening of the Omicron strain, better than expected global oil demand, weak supply growth, intensified geopolitical turmoil in Russia and Ukraine, and snowstorms in the United States, international oil prices have shown a strong upward trend
.
The average price of Brent crude oil has been $87.
66/barrel since January, and $92.
04/barrel
since February.

On February 14, the geopolitical risk premium pushed international oil prices up more than 2%
as market fears of a possible Russian invasion of Ukraine intensified.
The Brent crude oil futures contract for April closed at $96.
48 per barrel, approaching the $100 / barrel mark, the highest level since September 2014; The March WTI crude futures contract settled at $95.
46/b, the highest level
since September 2014.

At present, the oil market presents the characteristics
of "four highs, two lows and one strong" with high oil prices, high discounts, high gross profits, high demand, low inventories, low supply and strong structure.
As crude oil futures prices continue to rise, spot prices are also rising
.

The main reasons that have supported the recent rise in oil prices

Global crude oil supply is growing slowly
.
Although OPEC+ maintained its production increase plan, the lack of spare capacity has increasingly become the focus
of market attention.
Statistics show that the current OPEC+ spare capacity is only about 4 million barrels per day, mainly concentrated in a few oil-producing countries such as Saudi Arabia and the United Arab Emirates, and it is difficult for Russia, Angola and Nigeria to increase production
.
In January, OPEC+ crude oil production rose 600,000 b/d month-on-month, 620,000 b/d below the production ceiling and the ninth consecutive month below the agreement allow.

In addition, U.
S.
shale oil production growth has been sluggish, with U.
S.
crude oil production currently at just 11.
6 million b/d, well below the pre-pandemic 13 million b/d, and is expected to increase by only 600,000 b/d
in 2022.

Global oil demand was significantly better than expected
.
Since the beginning of the year, oil demand has rebounded in retaliation due to the fact that most of the diseases caused by the Omicron strain are mild, and the total number of vaccinations in the world has exceeded 10 billion doses, and many countries in Europe and the United States have successively lifted
lockdown measures.
At present, US oil demand has exceeded pre-epidemic levels, and oil demand once climbed to more than 22 million barrels per day in a single week, the highest level in the same period in history; Oil demand in Europe, Japan, India, South Korea, Singapore and other places has also basically recovered to pre-pandemic levels
.
In the later stage, as the weather warms, the demand for gasoline and jet fuel will continue to increase, especially the demand for aviation fuel in Europe and the United States is growing strongly
.

Geopolitical turmoil has intensified
globally.
In 2022, several oil-producing countries will usher in an election year with frequent supply disruptions
.
At the beginning of the year, Libya, Nigeria, Ecuador, Turkey and other countries experienced sudden supply disruptions, tightening market supply
.
Since the beginning of the year, the situation in Russia and Ukraine has affected the nerves of the market, the two sides have continued to intensify war warnings, and geopolitical tensions continue to bring risk premiums to oil prices
.
Although the probability of a large-scale war between Russia and Ukraine is low, it is not ruled out that the possibility
of "brushing the gun" or sanctions against Russia by Europe and the United States in extreme cases is not excluded.

Global refining gross profit returned to normal
.
With the rapid growth of oil demand, the refining gross profit of the world's three major refining centers has all returned to normal levels, with the average refining gross profit in the US Gulf region averaging US$14.
54/barrel, the average in Europe being US$5.
6/barrel and Singapore averaging US$6.
49/barrel
so far in 2021 。 At the same time, the global performance of intermediate distillates is eye-catching, and the diesel cracking spread in Singapore is approaching US$20/barrel, the highest level since October 2018; Jet Coal cracking spreads recovered to $15/b, the highest level since October 2019; The gasoline cracking spread exceeded $17/b, well above pre-pandemic levels
.

Global oil inventories continue to run
low.
As of February 10, 2022, global onshore crude oil inventories were 2.
86 billion barrels, down nearly 230 million barrels year-on-year, 32 million barrels lower than the five-year average, and refined oil inventories in major regions of the world were 590 million barrels, 65 million barrels lower than the five-year average and the lowest level
in the same period in recent years.
OECD inventories are currently at 2.
68 billion barrels, a new low in the same period in nearly seven years, of which US oil inventories are 1.
17 billion barrels, the lowest level
in the same period in nearly six years.
According to estimates, global oil inventories continue to run at a low level in the first quarter of 2022, and it is expected to destock 200,000~500,000 barrels per day
.

However, since the current round of oil price rises has been going on for some time, as the bullish factors are exhausted, it is necessary to be vigilant against the recurrence of bearish factors and the risk
of profit taking under high oil prices.

The main inhibitor to the current oil market

The Iranian nuclear negotiations are expected to reach a short-term agreement
.
The Iranian nuclear negotiations are the biggest "gray rhinoceros" in the current oil market
.
As the United States and Iran negotiate key provisions of the Iranian nuclear program, U.
S.
Secretary of State Antony Blinken recently signed several sanctions waivers related to Iran's civilian nuclear activities, allowing international cooperation projects
.
In 2021, 800,000~1 million barrels per day of Iranian crude oil flowed into the market through gray channels, 1.
2 million barrels per day
below normal levels.
The market widely expects that the United States and Iran may reach an interim agreement, and Iran's crude oil exports in the second quarter are expected to increase by 500,000 barrels per day
.

The impact of high oil prices on consumer countries is gradually emerging
.
With oil prices soaring, U.
S.
gasoline prices have risen to $3.
4/gallon, the highest level since September 2014; Japan was forced to raise fuel subsidies, and Kazakhstan urged domestic producers to increase production
as soon as possible.
Similarly, when the international oil price is higher than 80 US dollars / barrel, China's refined oil price transmission mechanism changes, superimposed on the high spot discount, refinery processing profits will decline
.
In February ~ April, the United States has more than 10 million barrels of strategic crude oil reserves still to be released, China is expected to release the second batch of strategic crude oil reserves, does not rule out the possibility
that consumer countries may join hands again to release reserves to suppress high oil prices.

The Fed is about to start the process
of raising interest rates.
The Fed is likely to start raising interest rates by 25 basis points in March, and it is not ruled out that it will raise rates at every meeting this year
.
The market now expects the Fed to raise interest rates five times this year by 25 basis points
each.
A rate hike would tighten market liquidity and push up the dollar, essentially putting pressure
on financial and commodity markets.
Judging from the performance of the financial market before and after the Fed's interest rate hikes, the interest rate hike has more significant inhibition on U.
S.
stocks, and the impact on the oil market is relatively limited
.

Fund bulls may take
profits.
Recently, investment banks and funds have frequently sung high on commodities, and fund bulls have continued to increase their positions in crude oil, especially in the context of the widening of the structure of benchmark oil, crude oil futures rollover income has increased sharply, and the scale of index funds has expanded
rapidly.
At present, the fund's net long position in WTI crude oil futures reached 270,000 lots, an increase of 57,000 lots from December last year; the fund's net long position in Brent crude oil reached 230,000 lots, an increase of 100,000 lots
from December last year.
From historical experience, after the fund's net position increases by more than 100,000 lots, the possibility of profit-taking often increases, and the fund has shown signs of reducing its position in the past week, so be wary of more profit-taking
in the future.

From the perspective of the future market, the fundamentals of the oil market "four highs, two lows and one strong" in the first half of the year are difficult to fundamentally reverse, superimposed on geopolitical turmoil, international oil prices generally maintain a medium and high level of operation, and are getting closer
and closer to the $100 / barrel mark.
At the same time, we must be wary of the risk
of oil prices falling at key nodes such as the Fed's interest rate hike and the conclusion of the Iranian nuclear negotiation.

News link: Oil prices are expected to hit $100 per barrel

As oil demand continues to outpace oil production, an energy fund manager said fundamentals are in place and oil prices are on track to reach $
100 a barrel, according to Bloomberg.

Eric Natol, senior portfolio manager at Ninepoint Partners, said, "Global oil demand has returned to pre-pandemic levels
.
So there is every reason to believe that demand will continue to grow, but the real problem is supply
.
We are in a structural bull market, and this multi-year oil bull market will end with unprecedented oil prices.
"

Federal Reserve Chairman Jerome Powell said he would accelerate the exit of the stimulus program, driving commodity prices up
along with the stock market.

Natall believes that under the influence of the epidemic, demand in the first half of the year will be in a "digestion period" and normalization, and the second half will be the post-shale era, but the main factor will be OPEC's limited production capacity
.
OPEC's exhaustion of spare capacity will be the most optimistic watershed event
for the oil and gas industry in decades.

Ninepoint Energy Fund returned more than 180% in 2021, far surpassing the TSX Composite Index and topping
the energy fund rankings.
For now, Natall uses a conservative $70 a barrel oil price to gauge investment opportunities and said retail investors are finally back in the energy sector
after years of underperformance.