Supply and demand are difficult to balance How far can the "bumpy journey" of crude oil go

Structural contradictions caused by geopolitical risks may help oil prices remain strong

The energy game between Europe, the United States and Russia continues to intensify, the global crude oil supply is facing uncertainty, and the local energy supply shortage further supports the oil market
.
The Russia-Ukraine conflict will also have a certain impact on the global economy and oil consumption, and oil price fluctuations will continue to be disturbed
by geopolitical factors.

A high inflation has dampened consumption, and global economic growth is under pressure

High inflation increases downward pressure on
the economy.
Since the beginning of this year, the Russia-Ukraine conflict has led to a shortage of supply of some commodities in the world, resulting in a sharp rise in the prices of energy, finance, and agricultural products (6.
49 -0.
46%, diagnostic stocks), and triggering a further increase
in global inflation.
Data released by the US Department of Labor on June 10 showed that the US consumer price index (CPI) rose 1% month-on-month and 8.
6% year-on-year in May, the largest
year-on-year increase since December 1981.
Statistics released by the European Union showed that after climbing 7.
4% in April, the Eurozone's preliminary harmonized CPI rose 8.
1% year-on-year in May, higher than the 7.
8% expected by Bloomberg economists, reaching an all-time high
.
One-third of the EU now have double-digit inflation rates, with countries that are more dependent on Russian energy becoming more acute
.

The United States has continuously raised interest rates, and liquidity has continued to contract.

In order to curb inflation, the United States entered a rate hike cycle in March this year, announcing a 25 basis point interest rate hike in March, which is the first rate hike by the Fed since 2018; A 50 basis point rate hike was announced in May, while it is expected that there will be 4-5 rate hikes during the year, and the balance sheet
will begin to shrink in June.
A significantly faster pace of Fed rate hikes would lead to tighter global liquidity and would lead to lower demand from real businesses, which would weigh on commodity prices
.

Global economic growth is under pressure
.
The IMF's latest forecast sharply lowered its growth forecasts for global and major economies, with global growth expected to grow by 3.
6 percent in 2022, 0.
8 percentage points
lower than its January forecast.
A series of sanctions brought on by the Russia-Ukraine conflict have pushed up commodity prices as well as inflation, and financial conditions have tightened
due to interest rate hikes in major economies around the world.
The IME warned that if the West does not lift sanctions against Russia and crack down on Russian energy exports more widely after the Russia-Ukraine conflict stops, global economic growth may slow further and inflation will be higher
than expected.

B The energy market game has intensified, and there is uncertainty in the supply of crude oil

Global upstream investment in oil and gas is low, and spare crude oil production capacity is limited
.
Under the pressure of energy transition, global upstream capital expenditure on oil and gas has shown a downward trend
in the past 10 years.
According to IEA data, global upstream investment in oil and gas was $350 billion in 2021, compared with $500 billion in 2016-2019 and more than $800 billion
in 2014.
Rystad Energy expects global oil and gas upstream capital expenditure to increase by 12% in 2022, but under the long-term pressure of energy transition, the growth of investment in traditional upstream industries represented by oil majors will be significantly constrained, and the overall growth rate is expected to be limited
in the future.
In the context of a significant decline in upstream investment in oil and gas, global spare crude oil production capacity is also relatively limited
.

OPEC+ increased production, but the implementation rate of production cuts remained high
.
In response to the tight supply in the market, the OPEC+ meeting in early June agreed to increase production by 648,000 b/d
in July and August.
At the July 2021 OPEC+ meeting, it was decided to maintain the recovery rate of 400,000 b/d, and after using a new production baseline in May, production was increased by 432,000 b/d
in May and June.
However, since the beginning of this year, the OPEC+ production cut implementation rate has continued to rise, even exceeding 220% in April, which means that OPEC+ production has not recovered as expected
.
After increasing production in July and August, Saudi Arabia's production is expected to increase significantly, on the one hand, due to the relatively large amount of Saudi Arabia's remaining crude oil production capacity, and on the other hand, the United States is also actively seeking to contact Saudi Arabia to promote Saudi Arabia to increase production
.
Overall, in the case of tight crude oil supply, the pace of OPEC+ production recovery will accelerate
significantly in the second half of the year.

The United States eased sanctions
on Venezuela.
Due to the lack of global oil supply, the United States eased sanctions on Venezuela to supplement market supply, allowing some European oil companies to import Venezuelan oil
.
Since 2019, Venezuela's crude oil output has fallen sharply due to the deteriorating domestic situation, while the country's crude oil exports have continued to decline
due to US sanctions 。 Venezuela is currently the country with the largest crude oil reserves in the world, but the country's crude oil production has been not high, around 2000, Venezuelan crude oil production reached 3 million barrels / day, and in the past 20 years, the country's crude oil production has continued to decline, and due to the turmoil in the country and US sanctions, the country's crude oil output has further contracted in recent years, and the output once fell to more than 300,000 barrels / day in mid-2020, and is now rising to about
700,000 barrels / day.
At present, even if sanctions are eased, the potential for crude oil production to recover is relatively limited
due to the lack of maintenance funds in Venezuela.

The EU has adopted a sanctions plan against Russia, and Russian supply faces further resistance
.
In early June, the 27 EU member states formally approved the sixth round of sanctions against Russia, and the EU approved the imposition of a ban on Russian seaborne oil, which will be implemented in stages, including a six-month ban on the import of Russian crude transported by sea to EU member states, and a ban on the import of Russian refined products for eight months, as a concession to Hungary and other landlocked countries, pipeline crude oil is temporarily exempted
.
Under the EU sanctions package, existing Rosneft ship insurance contracts will be phased out within 6 months, including an immediate ban on new contracts
for ships transporting Russian oil.

Since the escalation of the Russian-Ukrainian conflict, Europe and the United States have launched a series of sanctions
against Russia.
Previously, the United States, the United Kingdom, Canada, Australia, Poland and other countries have successively announced that they will stop importing Russian oil and natural gas and other energy sources, and the EU plans to end its dependence on
Russian natural gas, oil and coal by 2027.
In fact, in April and May, due to the decline in Russian diesel supply to Europe, European diesel prices rose sharply, and at the same time, due to the increase in refined oil exports to Europe by the United States and the peak season of gasoline consumption in the United States, the price of gasoline in the United States also rose to the highest level in history, and the profit of refined oil cracking in Europe and the United States rose sharply
.

With the gradual entry into force of EU sanctions against Russia, there is still an expectation of a further decline in Russian oil supply, especially in the European market
.
From the perspective of Russian supply, the total external supply of Russian oil remained stable in April and May, and the export loading of Urals crude oil and ESPO crude oil increased significantly, but the export load of CPC pipeline decreased due to early maintenance
.
From the perspective of supply flow, the flow of Russian crude oil to Asia has increased significantly, while the flow to Europe has declined, and this trend is expected to continue
in the future.

The recovery of the U.
S.
shale oil industry remains slow
.
Due to the changes in the business strategies of North American shale oil companies, in the past two years, the investment in upstream exploration of North American oil and gas is less than half of the level of the first half of 2014, and the implementation of the green new policy after Biden took office has also significantly inhibited the investment in the traditional petrochemical industry, and the current prosperity of the US shale oil industry is still not high
.
Since the second half of 2020, upstream investment activity in the United States has continued to pick up, and the number of active drilling rigs has continued to grow, but the absolute volume is still at a historically low level
.
At present, the inventory wells in the seven major shale oil producing areas of the United States are still showing a downward trend, the total volume has fallen to the lowest level since the end of 2013, while the number of drills and completions has continued to increase, but the production rate has shown a downward trend
.

From the perspective of single well production in the seven major shale oil producing areas in the United States, it has continued to decline since the beginning of last year, which has generally curbed the growth of
shale oil production.
As of early June, U.
S.
crude oil production reached 11.
9 million b/d, still about 1.
1 million b/d
below pre-pandemic peaks.
Current U.
S.
shale oil production is mainly from the Permian region, which reached a record high
of 5.
13 million b/d at the end of May.
In mid-April, the U.
S.
government announced the end of a 15-month lease ban and the resumption of lease sales for oil and gas drilling on federal lands, but the relaxation is expected to have limited impact on upstream exploration investment by U.
S.
shale companies due to limited
approvals and high royalties.

Oil inventories remain low, and tight supply continues to support oil prices

A slowdown in global economic growth is expected to weigh on oil consumption
.
At present, global oil consumption is still in the post-epidemic recovery stage, especially subject to the epidemic, and there is still a big gap
between global jet fuel consumption and the pre-epidemic level.
At the same time, oil consumption is also expected to come under pressure
in the medium and long term as a series of sanctions brought about by the Russia-Ukraine conflict and shrinking market liquidity will cast a shadow on future global economic growth.
In addition, we found that when oil prices are above $100/barrel, oil consumption has a negative correlation with oil prices, which means that high oil prices will suppress oil consumption
.

Since the beginning of this year, the overall oil price has fluctuated around $100 / barrel, and the price of cloth oil in early March was once close to $140 / barrel, which to a certain extent restrained the growth of oil consumption, but even if oil prices fall below $100 / barrel in the future, the growth of global oil consumption will be significantly constrained
due to further slowdown in economic growth 。 Recently, many institutions have lowered their global oil consumption forecasts for this year, and the EIA, IEA, and OPEC believe that global oil consumption growth in 2022 will be 2.
22 million b/d, 3.
37 million b/d, and 1.
8 million b/d, respectively, all of which have lowered their oil consumption forecasts
for two consecutive months.

The epidemic has repeatedly continued to weigh on jet coal consumption
.
The epidemic situation in many countries around the world continues, and the aviation industry continues to be hit.

At present, global flight capacity is still about 20% lower than before the epidemic, of which international flight capacity is about 30% lower than before the epidemic, and the recovery of domestic flights in various countries is generally better than the recovery
of international flights.
Recently, the epidemic situation in Asia has intensified significantly, and international flights in Asia have been significantly hit, and the capacity of international flights in eastern Asia has been 70%-80% lower than the same period in 2019, while the capacity of international flights in Europe and the United States is also 10%-30%
lower than the same period in 2019.
In terms of jet fuel consumption, according to IEA statistics, global jet fuel consumption is expected to reach 5.
21 million b/d in 2021, still 34%
lower than before the pandemic.
The IEA expects global jet fuel demand growth to accelerate in 2022, increasing by 820,000 b/d to 6.
04 million b/d, but still about 24%
lower than before the pandemic.

The cracking spread of refined oil products in the United States is high, and refinery starts are
high.
Recently, due to the decline in Russian oil supply and seasonal demand growth expectations, the US market has experienced a shortage of gasoline and diesel supply, and the gasoline and diesel cracking price spread has still strengthened sharply, and boosted refinery production enthusiasm
.

In early June, U.
S
.
refinery overhauls were below historical levels, while refinery runs rose to record highs, boosting refinery crude processing demand to some extent, and U.
S.
refinery starts will remain relatively high with the arrival of the seasonal consumption season.
From the perspective of terminal consumption, the United States is entering the summer consumption season, gasoline consumption will increase seasonally, and due to the current US gasoline inventory continues to decline, the arrival of the peak consumption season will aggravate the tight market supply, but the current high oil prices will inhibit terminal demand
to a certain extent.

China's crude oil imports and refinery processing demand have continued to decline
.
Under the background of the "dual carbon" policy, the management of domestic crude oil imports has become stricter, especially the quota management of non-state-owned refineries has been significantly tightened
.
From January to April 2022, domestic crude oil imports reached 170 million tons, a cumulative decrease of 4.
8%
year-on-year.
China's non-state-owned crude oil import quota in 2022 totaled 243 million tons, unchanged from 2021, while from the first batch of quotas issued this year, the total amount reached 10,903 tons, a decrease of 11% from the same period in 2021, and some independent refineries in Shandong and Northeast China were reduced
.
From the perspective of refinery demand, affected by the decline in demand and lower profits, the operating load of domestic main and local refineries has continued to decline since late March, but the operating load of local refineries has picked up in mid-May, and the operating load of main refineries has also begun to pick up
in early June.
Data show that the operating rate of domestic main refineries rose to 71% in early June, while the operating load of local refineries rose slightly to 64%.

From January to April 2022, the cumulative domestic crude oil processing volume reached 223 million tons, down 3.
8% year-on-year, while the monthly crude oil processing volume in April fell by 10.
5%
year-on-year.

At the macro level, due to a series of sanctions brought about by the Russia-Ukraine conflict and the ongoing epidemic, coupled with the tightening of liquidity brought about by interest rate hikes in various countries, the outlook for global economic growth is worrying and dampening oil consumption expectations
.

From the perspective of crude oil supply and demand, the overall decline in capital expenditure of global oil and gas upstream exploration enterprises has led to insufficient spare crude oil production capacity, coupled with the weaker-than-expected recovery of OPEC+ supply and the limited increase in shale oil in the United States, limiting the increase in crude oil supply
.

The energy confrontation between Russia and Europe has further increased the uncertainty of Russia's energy supply, and it is expected that Russia will continue to reduce energy supply to Europe and increase energy supply
to Asia and other places in the future.
At present, the performance of oil consumption in Europe and the United States is relatively stable, due to the shortage of supply, the crack price difference between Europe and the United States gasoline and diesel continues to be at a high level, and the short-term demand in the United States and the United States is expected
to recover in stages.
Overall, the current crude oil supply and demand structure is still tight, and global oil inventories remain low
.

From the perspective of oil price trends, the current supply and demand structure of crude oil is still tight, supporting oil prices to remain high
.
In the medium and long term, if the EU imposes an oil embargo on Russia will exacerbate the tight supply of crude oil, oil prices will still be supported to remain high or further higher, otherwise there is a weakening expectation
of the crude oil balance sheet in the absence of a significant decline in Russian supply and weakening demand in the economic pressure.