The supply and demand sides support the current international oil prices

Since 2022, international oil prices have accelerated their rise
.
On February 24, Brent intraday price rose as high as $105.
72 per barrel
.
From the perspective of supply and demand fundamentals, the recent continuous rise in international oil prices is the result of "supply-side dominance and joint action of both supply and demand", and it is difficult to have a significant decline
in the short term.

With the gradual stabilization of the epidemic, economic growth has supported oil and gas demand

From the perspective of demand-side factors, first of all, economic growth after the gradual stabilization of the epidemic may drive the growth
of global crude oil demand in the short term.
In 2020, oil consumption growth fell by nearly 10%
compared to 2019.
Although 2021 is estimated to be better than 2020, it is difficult to return to pre-pandemic growth levels
.
In this case, international oil prices have increased significantly, indicating that the demand side is not the most core factor leading to this wave of oil price surge; Conversely, after the gradual easing of the epidemic, the growth of crude oil demand will also support
international oil prices.

Second, in the medium and long term, although global climate and environmental governance factors will promote the transformation of the energy industry and have a disruptive impact on the growth of oil consumption in the medium and long term, oil and gas will remain the undisputed main energy
source in the world for a long time to come 。 Whether it is a large-scale power outage in California or the energy crisis in Europe, it reflects the shortcomings in the adequacy and reliability of renewable energy supply, verifies that some energy companies are too radically transforming and developing new energy, which in fact has a significant negative impact on ensuring supply security, and also shows that there is still a long way to go to truly replace new energy
.
Wood Mackenzie predicts that oil and gas will continue to grow to 200 million barrels per day of oil equivalent until 2035, of which crude oil will increase by about 10 million to 20 million barrels per day on top of the current demand of 80 million barrels per day
.

The global oil and gas production increase capacity is not as good as expected, putting pressure on the supply side

From the perspective of supply-side influencing factors, in terms of resources, due to resource endowment, technical level and investment, the global new oil reserves show an overall downward trend
.
According to the Global Oil and Gas Exploration Status Report released by RichEnergy, exploration drilling activity in 2021 was basically the same as in 2020, but new reserves of conventional oil and gas discoveries fell by nearly 60% to only 4.
9 billion barrels of oil equivalent, the lowest
in nearly 75 years.
Among the new discoveries, offshore oil and gas reserves increased (72% of the total discoveries in 2020); At the same time, the average depth of new discoveries at sea has increased by 500 meters in the past 10 years, which means that these reserves will require more advanced technology and pay relatively more costs
when used passively in the future.
In terms of investment, global upstream investment fell from 600 billion to 800 billion US dollars / year from 2010 to 2014 to 300 billion US dollars / year
in 2020-2021.
Due to the lag between upstream investment and exploration and development results, insufficient investment will inevitably have a negative impact
on future upstream storage and production growth.

U.
S.
shale oil production grew less than expected
.
First, investors in the U.
S.
shale industry believe that there may be disruptive risks in the future, so they shift their focus from growth to value return, requiring timely dividends and increasing the distribution ratio, which has a greater
impact on the reinvestment of production and operation 。 Second, the current paradox between the reinvestment rate, free cash flow level and production of U.
S.
shale oil is formed, at $60/barrel oil price, an average reinvestment rate of 50% will lead to a 20% reduction in U.
S.
shale oil production, but the free cash flow generated is 20% higher than the average reinvestment rate of 70%; An average reinvestment rate of more than 70% will lead to a significant increase in new U.
S.
shale oil production, which may trigger international oil price fluctuations and lead to lower
corporate free cash flow.
Third, the environmental protection policy of the United States has imposed greater restrictions on shale oil development, including 17 executive orders such as banning new oil and gas permits on public lands and waters, which if strictly enforced, may affect shale oil production
of up to 2 million barrels per day.
Fourth, the trend of concentration of shale oil development in the United States will be more obvious, and in the context of technological and management innovation that it is difficult to achieve new breakthroughs in the short term, through mergers and acquisitions to achieve scale effects and economically meet the operational requirements
of enterprises.
However, the overall investment and production scale of the shale oil business after the M&A transaction is generally lower than before
the M&A activity.

OPEC+ actual production increase capacity may be significantly lower than market expectations
.
First of all, because most OPEC+ members are highly dependent on oil, their fiscal equilibrium oil prices are generally high, most of which are above $70-100/barrel or even $
140/barrel.
Judging from OPEC's historical experience of "controlling production through quota systems in higher oil price ranges", the organization may not have the intention
to significantly increase production at this stage.
Second, countries with relatively stable supply such as Saudi Arabia have limited surplus production capacity despite their abundant resources
.
It will also take a long
time for countries such as Syria, Libya and Iraq to recover production capacity.
Among them, Iran is one of
the focuses of global oil and gas geopolitical risks in 2022.
In addition, Russia's near- to medium-term crude oil supply growth may also be lower than previous market expectations
due to changes in regional geopolitical risks.

Higher costs in the engineering services sector will also support oil prices
.
From the perspective of supply chain costs, since the outbreak of the epidemic in early 2020, the global price of various pipes, mainly steel, has risen by 100%-110%, and the prices of various electrical components such as wires and cables have increased by 75%-85%, all of which have brought greater pressure
to the development of the engineering services sector.
Wood Mackenzie predicts that in 2022, various global oil and gas engineering service companies will still face greater pressure due to rising supply chain costs such as labor, drilling rigs, motors, and pipes, and lead to a 4%-10%
increase in the cost of engineering services for upstream exploration and development enterprises.
(Hou Mingyang, Planning Institute, China Institute of Stone and Fossil Exploration)