When will the rise in oil prices peak?

The timing of the balance between supply and demand of crude oil will occur in the first half of the year, early Q1 and late Q2, mainly depending on the speed of
Q2 crude oil demand growth month-on-month.
It is expected that the price of crude oil this year will show a state of high and low, and the neutral assumption of WTI will oscillate at a high level of 90 to 110 US dollars / barrel in the first half of the year, and fall back to 80 US dollars / barrel
in the second half of the year.
The CPI energy item is expected to hover at its current position until the end of the second quarter and then fall, but the sharp decline in the CPI food item may not occur
until next year.
Against the backdrop of low oil inventories, the fragile supply elasticity caused by geopolitical risks will exacerbate the volatility risk
of crude oil markets.

(1) There are many short-term supply uncertainties, and insufficient long-term capital investment is the main reason for insufficient supply

In the short term, geopolitical risks such as civil unrest in Libya and the Ukraine crisis could lead to supply disruptions
.
In the medium term, the willingness of major OPEC countries such as Saudi Arabia, the United Arab Emirates, Kuwait and Iraq to increase production, and the capital expenditure of US shale oil determine the new supply
.
In the long run, insufficient upstream capital expenditure has led to limited
capacity increases in small countries such as Angola, Nigeria and the Congo.

OPEC＋

Since reaching an agreement last July, OPEC+ has been sticking to a timetable of gradual monthly supply increases, gradually resuming oil production
that stopped during the pandemic.
However, some member countries have not been able to increase production as planned due to insufficient investment and turbulence, and have not been able to increase supply
at the planned rate.
Production in OPEC+ countries increased by just 250,000 bpd last December, or 63 percent
of the group's set target.
OPEC's production increases in January continued to fall short of their quota
.
Among them, Iraq's production unexpectedly fell in January with both the willingness and ability to increase production; Production in Nigeria, Libya and other countries with frequent supply problems in January were flat or declined
within expectations.

In fact, with the exception of major countries such as Saudi Arabia, other small member countries are facing capacity bottlenecks
.
Russia, for example, said its main crude oil producers were close to full capacity
in November.
Russia's largest crude oil producer "Gazprom", Gazprom, also said that the company has no spare capacity and needs to continue to increase drilling speed
if it wants to continue to increase production.

Long-term insufficient capital investment is the main reason for
the insufficient supply of crude oil in some countries.
While oil prices will rise significantly in 2021, major oil companies have no plans to significantly increase capital expenditures, and improving investor returns remains a priority
.
Upstream oil companies' cash flow improved significantly in 2021, according to Rystad Energy's forecast, while oil prices continue to rise, upstream investment activity remains low, globally listed exploration and production (E&P) companies will generate record free cash flow in 2021, and FCF (upstream active cash flow) cash flow is expected to rise to $348 billion, up from the previous high of $311 billion
in 2008 。 The total revenue of all listed upstream companies is expected to increase by nearly $500 billion in 2021, an increase of 55% from 2020, but the growth of funds used for investment is only about 2%, resulting in a significant increase in
profits.
Rystad expects upstream investment to increase to $307 billion this year, up 7%
from $287 billion in 2021.
Capacity bottlenecks due to insufficient capital expenditures will be alleviated
this year.

Second, geopolitical tensions in the Middle East are also disrupting global crude oil production
.
On January 26, the Ukraine crisis and political turmoil in Kazakhstan briefly touched $90 a barrel
for the first time in many years.
This follows a sudden supply disruption at the two ports of Zawia and Mellitah and a pipeline in Libya, and Libyan production fell to its lowest level in more than a year (about 700,000 barrels per day
).
In addition, the ongoing armed conflicts in Syria and Yemen have also had some impact on
crude oil production.

Looking ahead, the situation in Russia and Ukraine will still disturb the risk premium of the crude oil market, but the OPEC+ production repair will continue
.
According to EIA data, global crude oil production in the fourth quarter of 2021 was 99.
09 million b/d, compared to the same period in 2019 that still has 3.
89 million bpd unrecovered, with OPEC and non-OPEC countries each accounting for about half of the gap
.
Under the current production increase plan, OPEC+ crude oil supply is expected to return to the level
of output before the April 2020 production cuts in July.
Although the current OPEC residual capacity has fallen from the high point at the beginning of 2021, it is still higher than the ten-year average, and the remaining capacity of major countries such as Saudi Arabia and the United Arab Emirates is enough to complete the production increase quota
.

Iranian supply is a potential variable
.
After Biden took office, there was a significant easing of U.
S.
-Iran relations, and Iran's external crude oil supply, which was restricted by sanctions, began to recover, and by October 2021, Iran's crude oil production increased to about 2.
5 million b/d, an increase of about 500,000 b/d from the end of 2020, but still about
1.
3 million b/d below the peak level.
In the future, whether Iran's crude oil supply can be further restored still depends on the progress of Iranian nuclear negotiations, and once an agreement is reached, it will accelerate the recovery
of Iranian supply.

United States

The cold wave that swept through Texas at the beginning of the year affected some shale oil production, restricting well production in cold conditions, and partly trucking transportation was suspended
due to icy roads.
Crude oil production fell to 11.
6 million bpd from 11.
8 million bpd at the start of the
year.

At present, the cold wave weather has eased significantly, and throughout the year, rising capital expenditure has pushed crude oil production back to 2019 levels in the second half of
the year.
Higher oil prices have led to a better-than-expected improvement in the economics of shale oil production, and according to Rystad Energy's forecast, investment in shale oil and gas is expected to increase by 18% this year to $102 billion compared to last year's $86 billion
investment.
The EIA expects U.
S.
crude oil production to average back to around 12 million bpd in 2022, 300,000 bpd
lower than the average in 2019.

At the end of this year, global supply is expected to increase by 4.
215 million b/d to 103.
6 million b/d, of which the United States, Russia and OPEC increased production by 950,000 bpd, 620,000 b/d and 1.
42 million b/d respectively from the end of last year, while other countries increased production by 1.
23 million b/d
.

(2) Demand has rebounded, and growth has declined

Since the beginning of this year, the market's concerns about the widespread impact of Omikron on oil consumption have receded, and the repair of aviation fuel consumption has led to an ultra-seasonal increase in
crude oil demand.
According to the latest EIA data, global oil demand in Q4 of 21 was 99.
7 million b/d, only 1 million b/d from the same period in 2019
.
In Q4 of 21 years, the growth rate of global oil demand was 5.
3% year-on-year, and the pre-epidemic level was only 0.
5%-2%, of which heating oil contributed to the main increase in
demand.

Looking ahead, after the seasonal heating demand in the cold winter has declined, the repair of aviation kerosene will dominate the further recovery
of crude oil demand.
However, this year, global economic growth has fallen, liquidity has tightened, and crude oil demand growth will decline
cyclically.
EIA expects full-year 2022 demand to be 100.
6 million b/d, up 3 million b/d from 2021 (IEA forecasts 3.
4 million b/d
).
The high point of demand growth is in Q1 of 22 years, and the subsequent year-on-year growth rate will fall back to 1.
8%
in Q4 of 22 years.

(3) When will the equilibrium between supply and demand of crude oil appear?

According to EIA's forecast, the global supply-demand equilibrium for crude oil will appear in the first half of this year, early in Q1 and late in Q2, depending on the magnitude
of Q2 crude oil demand growth month-on-month.

This year, crude oil prices showed a state
of high and low.
Under the neutral assumption, we expect WTI oil prices to fluctuate at a high of $90-110 in the first half of the year, and in the second half of the year, oil prices will fall back to $
80 as the supply-demand balance reverses.
However, in the context of low oil inventories, the fragile supply elasticity caused by geopolitical risks will exacerbate the volatility risk
of crude oil markets.

If oil prices continue to be high this year, what impact will it have on inflation and inflation expectations?

Over the past 20 years, oil prices have repeatedly broken through $100/b, but Michigan inflation expectations have not exceeded the 5.
2%
hit by crude oil prices at $134/b in June 2008.
One of the reasons is that the low proportion of household energy consumption in the United States to total consumption has led to a decrease in
the sensitivity of residents' inflation expectations to crude oil.
In the 1970s, the proportion of U.
S.
residents' energy consumption in total consumption was nearly 10%, and the trend declined since the 1980s, and the proportion fell back to about
4% after 2010.

Low oil price scenario: Crude oil prices are expected to peak in Q1 with a maximum of $100/bbl, followed by a linear pullback to $70/b
by the end of the year.

Neutral situation: Crude oil prices are expected to fluctuate at a high level of 90 to 110 US dollars / barrel in the first half of the year, and fall back to 80 US dollars / barrel
in the second half of the year with the reversal of supply and demand.

High oil price situation: Crude oil prices are expected to peak in the second quarter, with a maximum of $120 / barrel, with linear growth in between, falling month by month in the second half of the year, and falling back to $90 / barrel
by the end of the year.

Under the three oil price assumptions, the US CPI's food items and energy items both fell at
the end of the year.
The pressure on the April CPI remains strong under the assumption of high oil prices, and then falls significantly back to the level at the
end of the first quarter of 2021.
Under the neutral assumption, the CPI energy item hovered at its current position until the end of the 2nd quarter and then retreated
.
Under the assumption of low oil prices, the energy sub-item has been falling
rapidly since the first quarter.
But a sharp pullback in CPI food items may not occur
until next year.