Oil prices have finally returned to normal, and the response strategy is long-term

Although the international oil price in 2022 has an undercurrent, it will eventually return to normal
.
Chinese oil companies should adopt three major strategies: low cost, scientific and technological research, and multi-energy complementarity to cope with oil price fluctuations
.

Recently, oil prices have been mainly volatile at high levels

The global outbreak of the new crown pneumonia in 2020 completely changed the international crude oil market pattern
.
The epidemic has led to a sharp reduction in global crude oil demand of nearly 9 million barrels per day, Brent oil prices have fallen from $70/b in January 2020 to $21/barrel in April 2020, and the average Brent price has also fallen from $64/barrel in 2019 to $42/barrel in 2020.
However, stimulated by the "double easing" of fiscal and monetary in Europe and the United States, crude oil demand recovered rapidly, coupled with the large-scale continuous production reduction of "OPEC+", the average price of Brent recovered to $70 / barrel in 2021, and oil prices rose to $96 / barrel
at the end of the year, boosted by the geopolitical conflict between Russia and Ukraine.
Although international oil prices have experienced "roller coaster" fluctuations, the two-year average price is 57 US dollars / barrel, which is 7 US dollars / barrel lower than the average price in 2019, a decrease of about 10%.

In the long run, it is in the normal fluctuation range
.

In the short term, with Goldman Sachs, Morgan and other US investment banks pushing up the forecast of oil prices because of their own interests, Goldman Sachs has been advocating that oil prices will rise to 100~120 US dollars / barrel in 2021; Based on the slower recovery of global supply, institutions such as OPEC and EIA predict that the average Brent price in 2022 will be about 82~85 US dollars / barrel
.
However, in the long run, the return of US crude oil production within the year, the gradual increase in "OPEC+" production, and the possible return of Iranian crude oil, EIA predicts that oil prices will fall to $68 / barrel
in 2023.

Recently
, oil prices have been mainly volatile at high levels.
At present, the crude oil market is in the transition stage from supply to tight balance between supply and demand, and there will still be a period of tight supply before Iranian crude oil returns to the market
.

Due to investment restrictions, it is expected that U.
S.
shale oil production will increase by 600,000~800,000 barrels per day year-on-year in 2022, recovering to 12.
6 million ~ 12.
8 million barrels per day, close to the pre-epidemic level at the end of the year, but the growth rate is much smaller than during
2014~2019.
Adverse effects of policies, investment and the epidemic, under the condition that the return of US production is limited, and Angola and Nigeria within "OPEC+" will produce an average of 360,000 barrels per day less than their quotas in 2021, "OPEC+" will still adopt a strategy of limiting production and maintaining prices in
2022.

EIA expects OPEC crude oil production to be 34.
16 million b/d in 2022, up 2.
6 million b/d, or 8.
6%, or about 200,000 b/d
, month-on-month.
In the context of limited supply growth, oil prices have been dominated by high volatility recently
.

Under the pressure of high oil prices and high inflation, global political and economic interests will push supply up, and oil prices will eventually return to normal
.
On the supply side, the recent US-Iran negotiations have once again released positive signals, and on February 4, the United States announced the resumption of sanctions exemptions for some of Iran's civilian nuclear programs, and the possibility of Iranian crude oil returning within the year has increased
significantly.
If Iranian crude oil returns, it can provide 1 million ~ 1.
3 million barrels / day supply; U.
S.
shale oil, spurred by high oil prices, has accelerated its recovery and will end the year close to pre-pandemic levels
.
In Russia, Russian Deputy Prime Minister Novak recently said that Russia's crude oil production this year will reach the pre-epidemic level
.
In terms of finance, under the pressure of high inflation and mid-term elections, the Fed's interest rate hike and balance sheet reduction are put on the agenda, which will have bearish pressure on oil prices, if the United States tightens too much or too fast, crude oil demand growth is not as fast as expected
.
In the event that supply returns and demand does not grow as fast as expected, oil prices will return to a reasonable range
.

Oil prices will eventually return to normal

Supply and demand are decisive factors
for long-term oil prices.
Financial, geopolitical, and inventory changes can amplify current oil price volatility, but supply and demand remain determinants of long-term oil prices
.

In 2014, the explosive growth of shale oil production in the United States caused oil prices to fall from $110/barrel to about $30/barrel; In 2016~2019, under the effect of US sanctions against Iran and production cuts in Venezuela and OPEC, global supply decreased, and the average price returned to 60 US dollars / barrel; In 2020, oil demand fell sharply by nearly 9 million b/d, and the average price fell by nearly $22/b year-on-year to $42/b; In 2021, oil prices rose to $71 per barrel
due to global economic stimulus and insufficient investment in oil development, and the sharp production cuts of "OPEC+".
Therefore, supply and demand remain the fundamental driver and decisive factor of long-term oil prices, but financial, geopolitical and market speculative forces will increase the magnitude
of oil price fluctuations.

Oil prices will eventually return to normal
.
As the "blood" of industry, oil supply and demand are affected by the economic cycle and are also part of the
economic cycle.
The long-term oil price fluctuation cycle is 8~10 years, which is basically the same
as the Jugra cycle.

First of all, the oil industry is part of the overall economy, and the Jugra cycle of about 10 years affects the development of the oil industry, so oil prices also have a 10-year cycle; Secondly, the investment cycle of the oil industry itself is about
8~10 years.
In 2000~2002, China's accession to the WTO triggered an increase in demand, and the rise in oil prices led to an increase in investment in the oil industry; In 2010~2012, after the financial crisis, the global economy recovered and oil demand grew, entering a new round of investment cycle
.
It is expected that in 2022, under the condition of high oil prices and insufficient investment, a new round of oil investment cycle will begin, and oil prices will also return to normal
.

In general, the reasonable range of long-term oil prices is 60~80 US dollars / barrel
.
The lower bound of the range was raised to $60/barrel, on the one hand, because the cost of shale oil development in the United States has risen, and its production growth rate has gradually matched
the growth rate of conventional oil production.
$60/b is the lower limit for the oil industry to maintain sustainable development, and too low oil prices will lead to underinvestment and increase price volatility
.
Oil prices exceed $80/barrel, leading to a sharp increase in inflation and production, and oil prices will fall to a reasonable range
.

Three strategies to deal with oil price fluctuations

The life cycle of oil and gas upstream projects will generally exceed 30 years, and the development cycle of some oil and gas fields will be 50~100 years, so it will experience multiple rounds of oil price cycles
.
In addition, after the 2008 financial crisis, the United States became more and more dependent on debt-driven economic development, resulting in the global economy becoming dematerialized, increasing instability leading to increased fluctuations in crude oil demand, and accelerating
the switching of oil price cycles.
Upstream investment will experience multiple rounds of low oil prices, and investment decisions should be based on medium and low oil prices, rather than high oil prices
.

The low-cost strategy is the basic strategy to deal with oil price fluctuations
.
Economic fluctuations and oil price fluctuations are the norm, while oil and gas development is a long-term investment, and the development efficiency is determined by the development cost
.
The low-cost strategy responds to changes and is the basic strategy
to cope with oil price fluctuations.
In the long run, China's and global crude oil demand will gradually peak, on the one hand, the global production and sales of new energy vehicles will grow rapidly, and the substitution of crude oil demand will increase year by year; On the other hand, driven by the energy transition, the efficiency of traditional fuel vehicles has been continuously improved, and the overall demand intensity of crude oil has decreased
.
Peaking crude oil demand will again lead to the test
of low oil prices for upstream assets.
Continuously promoting the increase of single well production, reducing barrel oil costs, and improving the efficiency of single wells are the basic strategies
that oil enterprises should adhere to for a long time.
After all, high oil prices last for a short time, but it is easy to significantly increase costs, while low oil prices last for a long time and it is difficult
to reduce costs.

Insisting on technology research and development and application is the fundamental means
.
Due to the adoption and mastery of different technical means and systems, the barrel cost and development benefits of the world's major oil companies vary greatly
.
Looking at the world, although geopolitical factors will allow some companies to obtain low-cost oil and gas resources, it is still the core technology mastered by Western oil companies, which has considerable pricing power and can reap technological dividends
.
In contrast, without core technology advantages, Chinese oil companies are often forced to buy overseas oil and gas assets
at a premium under the pressure of domestic supply assurance.

In the case of Mobil, its deep-sea development and natural gas liquefaction technology advantages have given it low-cost access to Guyana's deep-sea crude oil assets and Mozambique's natural gas assets
.
Eni Group has obtained high-quality and low-cost resources
in Africa and Brazil due to its excellent exploration success rate.
In the context of the long-term game between China and the United States, it is more difficult for China to obtain low-cost oil and gas resources due to geographical factors, and whether it can master core technologies has become a key factor in whether it can obtain high-quality assets at low cost in the future, and insisting on the research and development and application of core technologies is a long-term strategy and fundamental weapon
to cope with oil price fluctuations.
Tackling and mastering shale oil low-cost rapid drilling, fracturing technology and natural gas liquefaction technology is the urgent need
of Chinese oil enterprises.

Multiple energy complementarities are key
to addressing the energy transition.
The rapid progress of the global energy transition will change the pattern
of energy supply and demand in the future.
Western oil companies have been transforming into energy companies, and some activists are even transitioning to electric power companies
.

However, Europe's transition has been too fast, leading to gas shortages and power crises
.
In view of the lessons of the Western energy transition and the reality of China's high dependence on foreign oil and gas, Chinese oil companies have a real responsibility to stabilize oil and gas and ensure the security of
national oil and gas supply.
At the same time, we must take a long-term view, actively reserve new energy technologies such as wind, hydrogen, and CCUS, and steadily promote the development of
new energy business.
During the period of high oil prices, part of the profits of oil and gas business will be invested in new energy business, forming profit points for new energy business during the low oil price period, so as to support the development of enterprises after the peak of oil demand, and form mutual support and benign interaction
.