Oil prices to "let me go" again?

Since the beginning of 2022, international oil prices have been rising, and the average price of Brent crude oil futures in the first half of the year was 104.
94 US dollars / barrel, and exceeded 120 US dollars / barrel
several times.
Geopolitical risks, the coronavirus pandemic and the Federal Reserve's monetary policy have dominated international crude oil prices
.
From the beginning of January to the end of June, the price of Brent crude oil futures increased by 44%, with an average monthly compound growth rate of 6.
5%.

Research analysis believes that it is expected that the average price of Brent will remain at a high level of more than $100 / barrel in the second half of the year, rising in the third quarter, and then fluctuating downward
.
The average price of Brent in the third quarter may be slightly higher than that in the second quarter, about 110~120 US dollars / barrel; In the fourth quarter, the average price of Brent decreased, about 90~100 US dollars / barrel; The average price of Brent throughout the year is 100~110 US dollars / barrel
.
In addition, the possibility of a sharp rise and fall in oil prices in the second half of
the year cannot be ruled out.
If the G7 imposes a price cap on Russian oil, Russia retaliates by cutting production, which may cause oil prices to climb above $150 per barrel; If the global economic outlook continues to deteriorate, bulls in financial markets flee from highs, which may cause oil prices to fall back below
$90 per barrel.

1.
Factors supporting the maintenance of high oil prices

Liquid fuel demand growth accelerated, with China being the main driver
of growth.
Global demand for liquid fuels is expected to increase by about 1.
5 million bpd
in the second half of the year compared to the first half.
Among them, China's demand growth is about 0.
7 million barrels per day
when the epidemic is under control.
The United States and the Middle East each increased by 0.
2 million b/d; Demand in Europe and India was basically flat
due to high inflation.
Global demand for liquid fuels is expected to return to pre-pandemic levels of about 100 million barrels per day
throughout the year.

The Ukraine crisis has exacerbated market turmoil, with Western sanctions cutting Russian supplies
.
Russian oil production was 11.
3 million b/d in the first quarter of 2022, and Western sanctions reduced production by about 0.
8 million b/d in the second quarter and is expected to fall by 1.
2 million b/d to 10.
1 million b/d
by the end of the year.
The G7 is discussing limiting oil exports to Russia to about $45 a barrel
by controlling shipping insurance.
With Europe and other Western countries controlling ninety percent of the world's shipping insurance, the market expects the sanctions to be tougher
than the EU embargo on Russian oil.
If the sanctions land, Russia is likely to reduce production by an additional 20%~30% to counteract, and oil prices will skyrocket.

OPEC+ and the United States are weak in increasing production, and the market supply is tight
.
The implementation rate of OPEC+ production targets has been declining month by month, and crude oil production is currently 2.
70 million barrels per day
below the target.
OPEC+ plans to end the production cut agreement in August one month earlier, and there is uncertainty
about its subsequent decision.
OPEC+ currently has about 3.
77 million barrels per day of spare crude oil capacity, less than half the 2021 average, and its impact on the global oil market has significantly weakened
.
In the second half of the year, Russia reduced production due to sanctions, Iran and Venezuela were difficult to lift sanctions, and some member countries may reduce production due to high inflation and social unrest caused by the food crisis, and it is expected that the space for output growth is limited
.
The U.
S.
increased production less than expected, increasing production by only about 0.
3 million b/d in the first half of the year and likely to be reduced by hurricanes in the second half (0.
2 million b/d of production fell in the same period last year).

EIA expects U.
S.
crude oil production to be about 11.
92 million b/d in 2022, up 0.
79 million b/d year-on-year, down from 12.
29 million b/d in 2019
.

Global oil inventories are at historic lows, and consumption is difficult to reverse
.
The commercial oil inventories and strategic crude oil inventories of OECD countries were 2,669.
3 million barrels and 1,110.
1 million barrels respectively, falling to the lowest level
in nearly two decades.
U.
S.
commercial oil inventories were 1,180.
64 million barrels, the lowest in nearly five years, and the strategic crude oil reserve of 497.
87 million barrels could only be used by the United States for 25 days, falling below 500 million barrels
for the first time since 1985.

2.
Factors leading to the downward movement of oil prices

The global economic outlook has deteriorated significantly and the risk of recession has increased
.
The Ukraine crisis has intensified the impact on global supply chains, resulting in higher commodity prices, a surge in global inflation, severe challenges to the current world economy, increased the risk of stagflation and recession, and 1.
2 billion people in nearly 70 countries are facing epidemic, food, energy and debt crises
.
The IMF expects global GDP growth of 3.
6% and US GDP growth of 3.
7% in 2022, both of which are 0.
8 percentage points
lower than the forecast at the beginning of the year.
It is likely that the United States will start a mild recession from the fourth quarter and drag down the global economy
.

The mutated new coronavirus is widely spreading, and the uncertainty of prevention and control has increased
.
The virus is evolving in the direction of anti-vaccines, which brings great uncertainty
to the development of the epidemic.
Looking ahead to the second half of the year, Omicron variant BA.
5 and other variants are highly likely to cause multiple rounds of global outbreaks
in autumn and winter.
At present, many countries and regions have completely or partially canceled epidemic prevention and control measures, but the possibility
of reopening due to the intensification of the epidemic is not excluded.
In order to ensure the safety of people's lives and the smooth operation of the economy, China has implemented an epidemic prevention and control strategy of precise prevention and control and dynamic zeroing; With the continuous increase in the transmission of the new coronavirus variant strain, the task of follow-up domestic epidemic prevention and control is very arduous
.

Europe and the United States accelerated the tightening of monetary policy, which put pressure
on international oil prices.
In the first half of the year, the Fed raised interest rates by 150 basis points in four months and began to reduce its balance sheet in June, and is expected to raise rates by 175 basis points
in the second half of the year.
The ECB is expected to raise interest rates starting in July and is expected to raise rates by no more than 140 basis points
during the year.
With the aggressive interest rate hikes in Europe and the United States, causing panic in the financial market about the hard landing of the economy, bulls may settle profits and flee at a high level before the recession at the end of the year, resulting in a sharp fall
in international oil prices.

3.
Relevant policy recommendations

Strengthen the analysis and judgment of international oil price trends, and introduce regulatory measures
in a timely manner.
Recently, affected by comprehensive factors, international oil prices have fluctuated sharply at high levels, adversely
affecting China's energy security and economic development.
It is recommended to coordinate the efforts of all parties, strengthen the analysis and research of oil price trends, and introduce relevant industrial regulation and control measures in a timely manner to effectively prevent the adverse impact of large oil price fluctuations that may occur in the future on the domestic economic development, and strive for the initiative to complete the annual economic growth and inflation target tasks
.

Accelerate the capacity building of oil reserves and deepen international energy cooperation
under the Belt and Road Initiative.
At present, the scale of China's oil reserves is still far from
the international standard of 90 days.
It is recommended that the relevant competent departments of the state strengthen overall coordination and policy support, improve the national strategic and commercial oil reserve capacity as soon as possible, and effectively deal with the risk of
sharp fluctuations in oil prices.
The Ukraine crisis has had a big impact on the energy industry, many international oil companies have withdrawn from the Russian oil and gas industry, and Russia urgently needs new investors to enter
.
Asian oil companies are the main potential partners, but new foreign investors may face the risk of long-arm sanctions from Europe and the United States, so they need to choose the timing
carefully.
It is suggested that China seize the opportunity of the reconstruction of the global energy trade pattern after the Ukraine crisis, further deepen energy cooperation among countries along the "Belt and Road", unswervingly promote the pace of denominated and settled oil in RMB, and enhance China's voice in international pricing of commodities
.

Optimize the structure of overseas oil and gas assets, and take geopolitical risks as an important consideration for
overseas layout.
High oil and gas prices have led to higher valuations of oil and gas assets, which is conducive to the disposal
of high-cost overseas assets such as oil sands.
However, the rapid rise in international oil prices has widened the gap between buyers and sellers' expectations for the valuation of oil and gas assets, or led to a continuous wait-and-see attitude of buyers, making it difficult to realize transactions
.
It is recommended that the relevant national authorities strengthen overall coordination, promote petroleum and petrochemical enterprises to seize the window of high oil prices before the global recession, reasonably value overseas oil and gas assets, and accelerate the optimization
of asset structure.
Taking the Ukraine crisis as a guide, geopolitical risks should be taken as the primary consideration in the layout of overseas oil and gas assets, investment in low-risk regions should be increased, and assets of countries and regions with high geopolitical risks should be reduced
.