Rose! Rose! Rose! Is there a cap on international oil prices?

As of June 20, Brent and WTI crude oil futures, the two major international oil pricing benchmarks, rose more than 45% and 43% respectively during the year, reaching a maximum of $139.
13/b and $135.
50/bbl, respectively
, and the spread between the two once narrowed to less than $1/bbl.
Meanwhile, the U.
S.
price index rose 8.
6 percent year-on-year in May, the biggest increase since December 1981, far exceeding the Fed's 2 percent inflation target
.

The United States has released its strategic petroleum reserves three times

Curbing the rise in oil prices has not been successful

As of June 20, Brent and WTI crude oil futures, the two major international oil pricing benchmarks, were up more than 70%.

According to the Oil Price Information Service (OPIS), nearly 1/3 of the 130,000 gas stations surveyed by the American Automobile Association sell for more than $5 per gallon; There are 17 states and Washington, D.
C.
, with an average price above $5/gallon, with the average price of gasoline in California being $6.
4/gallon
.
This led U.
S.
President Joe Biden to send letters to a number of U.
S.
oil companies, including ExxonMobil, Marathon Oil and Valero Energy, asking them to increase oil investment and refinery operations to provide more oil and refined oil supplies and stabilize gasoline prices
.

In fact, in the process of this round of oil price increases, the US government has taken three unconventional measures to release strategic petroleum reserves, especially the announcement that from April 1 this year, the next 6 months will release 1 million barrels of strategic petroleum reserves per day, and the total amount of releases will reach 180 million barrels
.
However, the move did not change the upward trend
of oil prices.
Against this backdrop, the U.
S.
Senate Judiciary Committee passed the Prohibition of Oil Production and Export to Qatar (NOPEC) Act, which seeks to take legal measures to crack down on the oil production quota practices taken by OPEC and OPEC+ as monopolies, so that oil companies in the organization's member states can determine their own oil production
.

Meanwhile, the U.
S.
price index rose 8.
6 percent year-on-year in May (including a 34.
6 percent rise in energy prices), the biggest increase since December 1981 and far ahead of the Fed's 2 percent inflation target
.
To contain further increases in inflation, the Fed raised interest rates by 75 basis points in June, based on 25 basis points and 50 basis points in March and May, for the first time
since November 14, 1994.
However, Brent and WTI crude futures did not show a significant pullback and remained in the operating range
of $120/bbl.

Pricing mechanisms, supply and demand, and geopolitical factors

Dominate the trend of international oil prices

For the current international oil prices, it should be examined
from the three angles of the international oil market pricing mechanism and changes in supply and demand relations, and the pressure on international crude oil trade.

First of all, the international oil market pricing is generally linked to Brent and WTI crude oil futures, and then according to the specific crude oil sold, such as the density, sulfur content and other qualities, as well as the mode of transportation, transportation distance, etc.
to give a certain amount of water or discount
.
That is, the price of Brent and WTI crude oil futures determines the price of the international oil market
.
In fact, whether it is Brent crude oil futures or WTI crude oil futures, their prices are the result of futures market transactions, reflecting many factors
affecting the operation of the international crude oil market.
At the same time, with the development of the futures market, various types of funds, investment banks and other institutions for the purpose of earning trading spreads have replaced the entity enterprises for the purpose of managing the risk of price fluctuations as the main body of traders, and the high-frequency transactions they carry out have increased the liquidity of the market while aggravating price fluctuations
to a certain extent.
Therefore, entities including international oil companies have ceded the pricing power of crude oil to the futures market, and due to the large number of speculative participants, high liquidity, large trading volume of the crude oil futures market, and the price arbitrage characteristics of the futures market, the possibility
of crude oil futures prices being manipulated has been greatly reduced.
Oil companies, including producers, wholesalers and retailers, can only passively accept the results of
crude oil futures market transactions.
For the end consumer of crude oil products, they can only become the recipients of prices, and oil producers
should not be blamed for large price changes.

Second, the relationship between supply and demand in the international oil market is reversing, shifting from loose supply to tight
supply.
Although the outbreak of COVID-19 in 2020 exacerbated the situation of oversupply and led to an unprecedented agreement
on production cuts for OPEC+.
However, as the epidemic situation improves, the economy recovers, and the demand for crude oil consumption turns to growth
.
On the production side, the oil industry has insufficient investment in exploration and development, and crude oil production has begun to appear under the constraint of "the law of natural decline in production", and after experiencing low oil prices since 2014 and the serious impact of the epidemic on crude oil demand, the recovery process of global oil production is slow
.
As far as "OPEC +" is concerned, although a rhythmic increase in production has been implemented, the actual output has not kept up with the rhythm
of the increase in production.
Currently, OPEC+ has raised its June production target to 648,000 bpd, up from the 432,000 bpd
that has been in place recently.
However, its implementation rate of production cuts has been higher than 100% since the second half of last year, with 220% and 256% in April and May this year, respectively, and except for a few member countries such as Saudi Arabia, the United Arab Emirates and Kuwait that have increased production, other member countries have not completed quota production
.
From the perspective of spare capacity, the industry generally believes that only Saudi Arabia and the United Arab Emirates currently have a total of 2 million to 2.
5 million barrels / day of spare capacity, which is obviously difficult to make up for the decline in
actual production of oil-producing countries such as Russia and Libya.
In this scenario, the expectation that crude oil outstrips demand will dominate future futures market operations
.

Finally, in the context of dramatic changes in the geopolitical environment, the flow of international crude oil trade is changing, enhancing the convergence
of global crude oil prices.
Affected by the sanctions introduced by the United States and European countries in the oil sector, international crude oil trade no longer follows the principle of optimal flow and lowest cost, and Saudi Arabia has decided to reduce oil supply to the Asia-Pacific region and increase supply to Europe instead; European exports of refined oil products to Latin America have plummeted; The United States has increased its exports of refined oil products to Latin America to make up for the corresponding demand space
.
So far this year, the United States has shown an overall trend of increased net imports of crude oil, while net exports of refined oil products have increased, refinery operating rates have reached 94%, gasoline and diesel exports from the Gulf Coast have reached the highest level since 2016, motor gasoline inventories are 11% below the 5-year average, and distillate fuel inventories, including diesel, are below the 5-year average of 23%.

This led to a repair in the WTI crude oil futures price, which continued to narrow the spread with Brent crude oil futures, once shrinking to less than $1 / barrel, changing the long-term spread trend
.

Therefore, under the current situation, the downward adjustment of international oil prices is obviously insufficient, and there is still a potential driving force for
international oil prices to run upward in the short term.
However, the high operation of international oil prices, to a certain extent, boosted global inflation, the monetary policy of major economies is shifting from easing to tightening, if the pace of monetary policy tightening accelerates, interest rate hikes accelerate, may slow down global economic growth, while reducing crude oil demand to increase the cost of crude oil futures trading, is conducive to the downward adjustment
of international oil prices.

The oil and gas industry remains an important energy investment direction

It is necessary to keep oil production growing in tandem with economic development

Judging from the long-term stable operation of the international oil market and the promotion of an environment conducive to global economic growth, it is necessary to create a good atmosphere for promoting investment in oil exploration and development and increasing oil production, and maintain the synchronous growth
of oil production and the demand for economic development.

The first is to face up to the dominance of oil in the existing energy structure from a realistic point of view
.
In the context of responding to climate change, the world is promoting the transformation from fossil energy to renewable energy, but renewable energy is facing technological breakthroughs and application scenarios expansion, as well as the impact on the natural environment after large-scale application needs to be tested in many aspects, it is difficult to form a complete replacement of fossil energy in the short term, and oil will maintain a dominant position
in the energy structure 。 In the process of energy transformation, we should balance the relationship between "old and new", focus on the actual energy demand of economic and social development, maintain stable and sustained investment in fossil energy, effectively inhibit the "natural decline in production" to worsen oil and gas production, promote the increase of output at the lowest possible production cost, and create conditions
for meeting the energy demand of economic and social development at the lowest possible price.

The second is to face up to the impact of ESG on the development of the oil industry from a realistic point of
view.
The concept of ESG reflects the objective needs of the harmonious development of human society and nature, but ESG should not be made a shackle to economic and social development to greatly increase the cost of living or reduce the existing standard and quality of living, let alone cause energy shortages
.
Therefore, in the process of energy transformation, we should objectively grasp the long-term nature of energy transformation, and gradually integrate the concept of green development and ESG requirements into the exploration, development, production, and consumption of fossil energy such as oil and natural gas, so as to promote its clean and low-carbon production
。 However, it is necessary to prevent the transition of ESG and rise to the level of social ethics and non-legal obligations, create a stable and suitable atmosphere for fossil energy production, maintain the attractiveness of the oil and gas industry for investment, enable it to obtain sustainable investment, and at the same time enhance the ability of green development, it can produce energy products that are compatible with the needs of economic and social development in an optimal manner, play a good role in energy transformation, and create an orderly succession foundation
for renewable energy development.

The third is to face up to the relationship between the geopolitical environment and the energy market from a realistic point of
view.
Over the years, the imposition of economic and financial sanctions on some oil-producing countries has become the norm for some countries to cope with changes in the geopolitical environment, which has led to Iran, Venezuela, Libya and other important oil-producing countries being squeezed out of the international oil market one after another, reducing the supply
of oil.
In the changes in the geopolitical environment since the beginning of this year, the main European countries have still implemented an active embargo on Russian oil and gas in spite of the reality of energy shortages and sharp price increases, which has further worsened the tight supply situation in the international oil market and become the latest important factor
stimulating the rise in oil prices 。 Therefore, it is necessary to properly handle the relationship between the geopolitical environment and the energy market, highlight the importance of safeguarding the interests of the people and the steady development of the economy and society, pay deep attention to the global and price linkage of the international oil market, deeply realize that maintaining sufficient international oil and gas supply and market and price stability is to maintain national energy security, profoundly assess the impact of the use of energy bans as "weapons" on global energy security, domestic interests and the basic livelihood of the people, and strive for peace.
Prudent means such as peace talks promote the resolution of geopolitical conflicts
.

In short, the international oil market is experiencing new turbulence, and international oil prices are running at a high level, resulting in a sustained increase in inflation in major economies, and the impact on the interests of the people and economic and social development is gradually emerging
。 However, it is necessary to fully recognize the basic fact that international oil is shifting from supply looseness to tightness and that the futures market has fully controlled the international oil pricing power due to various factors, analyze, consider and evaluate energy products from the perspectives of energy transition policies, ESG investment and development concepts, and energy products as a means to resolve geopolitical conflicts, and take the oil and gas industry as an important energy investment direction, and effectively prevent the operation of oil and gas bans as "weapons" to resolve geopolitical conflicts and solve international problems.
Maintain the same rhythm of changes in oil and gas production and changes in demand for economic and social development, and provide stable supply and demand balance expectations for the operation of the oil futures market, so as to keep prices in a reasonable range
.