The mismatch between crude oil's fragile supply system and demand recovery

Against the backdrop of rising geopolitical risks in 2022, the fragility of the global crude oil supply chain will emerge, and high oil prices will become the
norm.
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Contrary to market expectations, we believe that the current supply system is fragile and intolerant
.
The current supply-side OPEC major producers Saudi Arabia, the United Arab Emirates and Iraq are only 530,000 bpd of production before the pandemic
.
Objectively, the ability to increase production is limited
.
Subjectively lack of motivation
to fight price wars.
At the same time, the opposition between OPEC as a resource production organization and consumer organizations such as the IEA is becoming more and more obvious, and it is not ruled out that resource producers will be reluctant to sell resources in the future
.
In the long run, the EU has a high certainty of getting rid of Russia's energy dependence, and the short-term failure of the EU's embargo on Russian crude oil may lead to weakening market sentiment and a phased correction
.
However, we believe that in the context of tight Russian refined oil products and crude oil storage, the short-term decline in Russian domestic demand will force the decline in oilfield crude oil production is more
likely.
Any new sanctions will further worsen
Russia's supply margin.
In addition, the market may be overly optimistic
about the supply available from Iran's return in the near future.
The shale oil industry, which used to play the role of shifter, faced supply chain problems, and the Biden administration's energy policy did not solve the core contradiction of how to increase supply, and also pushed up the upside risk
of crude oil when replenishing in the forward period in terms of releasing strategic reserves.

Contrary to market expectations, we believe the worst for crude oil demand has passed
.
(1) We believe that if the summer temperature is higher than usual, the strong global demand for power generation may boost the demand for
fossil energy.
(2) Secondly, crude oil consumption in Q3 will increase seasonally month-on-month, and (3) and we expect that with the improvement of the epidemic and the resumption of work and production, the recovery of logistics, and the subsequent domestic crude oil demand will also gradually improve (April due to the impact of the epidemic fell by 1.
51 million barrels / day year-on-year).

Overall, we believe that crude oil demand will improve marginally in late May - Q3
.

In the future, we believe that the factors that need to be paid attention to are mainly the conflict of geopolitical events and the increase in
European refinery operations.
Geopolitically, we believe that the main focus needs is (1) the possibility and pace
of Iran's production return.
(2) Changes in Russia's future production in
the context of the Russia-Ukraine conflict.
(3) The development of
the global epidemic.
(4) the possibility of further release of
strategic reserves by the IEA.
At the same time, the current European refineries are affected by the rising cost of hydrogen production caused by high gas prices, the reduction of Russian oil imports, the maintenance season and the rise in energy costs
.
After the overhaul season, watch for the increase in European refinery operating rates
.
At the same time, we believe that the shortage of diesel in Europe is difficult to improve
in the short term.

Risk warning: The global recession exceeded expectations, the global epidemic rebounded more than expected, and the global release of war reserves exceeded expectations
.