Our view: At the moment when oil prices rebounded sharply and market demand rebounded strongly, OPEC+ once again decided to extend production cuts and support prices (especially Saudi Arabia still sacrificed itself and continued to reduce additional production) far exceeds market expectations, which leads to the gradually tight balanced crude oil market becoming very sensitive to changes in the crude oil supply side in the future. In the future, the focus of market attention may return to the supply side under the influence of OPEC+, and the geopolitical attributes of crude oil will also be enhanced again.
suggests that investors continue to pay attention to the various statements and decisions of OPEC+ under the leadership of Saudi Arabia on the crude oil supply side. The adjustment of the supply and demand structure depends more on supply rather than demand. In the future, it is recommended to focus on the recovery of Iranian crude oil exports.
01 Conclusion
In the early morning of March 5, 2021, Beijing time, the crude oil market was once again detonated by the results of the OPEC+ meeting. Saudi-led OPEC+ unexpectedly announced that it would significantly slow down the recovery pace of crude oil supply, driving oil prices from both domestic and foreign markets to soar by nearly 5%. In this meeting, OPEC+ did not reach an agreement to resume production increase of 1.6 million barrels per day as expected, but only restored a total supply of about 76,000 barrels per day. Among them, Russia was allowed to increase the scale of oil production increase from 65,000 barrels per day to 131,000 barrels per day in April, Kazakhstan's was allowed to increase the scale of production increase from 10,000 barrels per day to 20,000 barrels per day, and Saudi Arabia extended the voluntary production cut of 1 million barrels per day for two months to May. This result is not only 1.5 million barrels per day less than the market's previously expected supply recovery, but also the market has expected tight supply in April as Saudi Arabia extends its additional production cuts.
02 Supply and demand pattern has shifted from a serious surplus to a tight balance
Since May 2020, OPEC+ has launched the largest super production cut in history to support oil prices, and has driven oil prices to rise steadily with the gradual improvement of crude oil demand. Judging from the global offshore crude oil floating warehouse and crude oil in transportation, the absolute values of these two important indicators have returned to the pre-epidemic level, which means that the supply and demand side of the crude oil market has gradually changed from a serious supply surplus in the second and third quarters of 2020 to a tight balance. Considering that the global major oil-producing countries are not uniform in their willingness to continue to reduce production, the recovery of crude oil production from any oil-producing countries will have an extremely important impact on crude oil prices, which means that OPEC+, which has the strongest influence on the crude oil supply side, will continue to become the focus of market attention in the next few months. For non-OPEC+ countries, we believe that the supply increase of oil-producing countries, including the United States, is likely to be relatively limited in 2021, and this will undoubtedly strengthen OPEC+'s voice in the crude oil market again.
Figure 1 Changes in global crude oil floating warehouse Unit: Thousand barrels
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
Figure 2 Changes in global water transport oil Unit: Thousand barrels
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
2.1 Capacity bottleneck restricts the US Shale oil supply recovery
On the supply side, the recovery of US shale oil supply is likely to slow down. This will support the continued rise of oil prices and will also weaken the pricing power of US shale oil in the global crude oil market. Judging from the situation in the past year, although the US shale oil production basically maintained its previous growth rate before the outbreak of the epidemic, its number of active drilling rigs has shown a gradual decline since 2019, which actually means an increase in the single output of drilling rigs. Therefore, we see that after the outbreak of the epidemic, with the gradual shutdown of drilling rigs, the US shale oil production declined very quickly. As demand gradually recovers, we see that the number of active drilling rigs in the United States is also increasing, but the growth rate is gradually slowing down. Considering the gradually shrinking capacity investment, it is questionable whether the number of active drilling rigs will rebound to the level before the outbreak of the epidemic in the future.
Figure 3: Changes in oil wells in the main shale oil production areas of the United States
Source: EIA, Guotai Junan Futures Industry Service Research Institute
Figure 4: Number of active drilling rigs in the United States:
Source: EIA, Guotai Junan Futures Industry Service Research Institute
For the judgment of the slow recovery of US shale oil production, we can start from the number of potential completions of shale oil production and the decline of single wellhead production capacity. In terms of potential completions in , although the rebound in oil prices since November 2020 can theoretically stimulate the increase in US shale oil production, we believe that the recovery of US shale oil production in the future is under great pressure. Due to the suspension of various crude oil production and operation activities such as drilling under the impact of the epidemic, we have seen a cliff-like decline in the number of new wells dug and completions in the main shale oil production areas of the United States in 2020. While this has caused a short-term decline in shale oil production, it has also ruined the room for future improvement of shale oil production capacity. After all, although the current DUC data is acceptable (but some DUCs are difficult to complete or have low cost performance), if the number of new wells cannot be recovered quickly in the future, it means that the import reserves available for conversion to DUC and completion are missing. Considering the severe epidemic situation in the United States as of December, it is very difficult to see a significant rebound in the number of new wells in at least the first half of 2021, which means that the supply recovery throughout the year is likely to be lower than expected.
Figure 5 Changes in oil wells in the main shale oil production areas of the United States
Source: EIA, Guotai Junan Futures Industry Service Research Institute
Figure 6 Comparison of changes in oil wells and oil prices in the main shale oil production areas of the United States
Source: EIA, Guotai Junan Futures Industry Service Research Institute
On the other hand, from the perspective of single well output, we see that in 2020 the yield of the wellheads of the United States hit a new high in recent years, which shows that the recovery of US output under the limited recovery capacity of drilling rigs has actually been relying on overdraft wellhead yield to achieve stable output. Among them, the yields in Bakken, Eagle Ford and Niobrara regions have the largest increase, but the output proportion in these production areas is relatively limited. In contrast, the main production area Permian has a very limited increase in yield. Considering that the life cycle of shale oil wellheads is very short, yields are originally very easy to decline, which means that the space for non-yields to continue to increase may be limited, and it also means that the life cycle of existing drilling rigs is being extinguished at an accelerated pace. Considering that the number of drilling rigs is unlikely to increase significantly in 2021, the overall supply recovery scenario of shale oil is very worrying. Of course, judging from the comparison of output and oil well changes in DUC and Permian areas of the main shale oil production areas in the United States, the prospect of supply recovery seems to be more optimistic than the above discussion based on yield and rig count. We have seen that the Permian region's DUC's share of all DUCs has continued to increase over the past year, but at the same time, the absolute number of DUCs has remained stable. This means that the increase in the above proportion is more due to the decline in DUC numbers in other regions, and also explains to a certain extent the higher yields in other shale oil producing areas such as Bakken, Eagle Ford and Niobrara, or more from the conversion from DUC to completion. From this perspective, if the Permian region accelerates the conversion from DUC to completion at necessary moments, its yields are also likely to increase rapidly in the short term. This needs to be judged in the future based on the progress of regional epidemic prevention and control. Of course, it must be pointed out that even in the Permian area, the number of new wells has declined rapidly in 2020, which means that the prospect of recovery of its production capacity is also not optimistic in the long run.
Figure 7 US new well yield Unit: barrel/day
Source: EIA, Guotai Junan Futures Industry Service Research Institute
Figure 8 Gas-oil ratio (Mcf/bbl)
Source: EIA, Guotai Junan Futures Industry Service Research Institute
2.2 Norwegian , Brazil is still the main force in non-OPEC+ supply recovery, but the marginal impact is limited
In addition to US shale oil, two other non-OPEC+ supply increments worth paying attention to in 2021 come from Brazil and Norway. Among them, Petrobras has taken a series of actions in recent years to introduce foreign capital to expand production capacity, including a huge amount of US$70 billion in overseas investment in the five-year period from 2020 to 2025. Therefore, it has maintained a steady increase in production capacity expansion in the past two years. In addition, some offshore crude oil development projects that have been delayed due to the epidemic in 2020 will most likely be postponed to continue investment and construction by 2021, and coastal oil and gas resources are expected to continue to be developed. Therefore, theoretically, after experiencing a brief slowdown in growth in 2020, Brazil's crude oil production in 2021 is likely to see a significant increase again, and may increase by 400,000 to 600,000 barrels per day under various calibers.
Figure 9Petrobras Company E; P and output (2005-2019)
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
Figure 10Petrobras Company E; P situation analysis (2005-2019)
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
And for another country, Norway, although capital expenditures declined to a certain extent in 2019, the overall decline was limited. According to Equinor's financial report estimate, it is likely that capital investment will continue to increase in 2021, which means that Norway's production expansion path is still continuing. And according to the official statement of Norwegian National Petroleum Corporation , crude oil production will continue to increase in 2021. Referring to the production expansion in previous years, there may be an increase of 200,000 to 400,000 barrels per day.
Figure 11Equinor Company E; P and output (2005-2019)
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
Figure 12 Equinor Company CAPEX Change (2005-2021)
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
Overall, due to the relatively peaceful capital expenditures in global crude oil production in previous years, theoretically, there is very limited room for crude oil production capacity to increase in 2021. In addition to OPEC+ and US shale oil, the main force in the future recovery of crude oil market supply will come from Brazil and Norway (there is no detailed discussion of crude oil production in other non-OPEC+ countries), with a total output of about 600,000,000,000 barrels per day in 2021. Since crude oil production in these two countries is more concentrated in the field of high production costs in the field of high-producing oil development, the pace of supply recovery is relatively calm, so the direct impact on the global crude oil market will be relatively limited.
Figure 13 Global capital expenditure for crude oil exploration and production
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
Figure 14 Types of capital expenditure for crude oil exploration and production in 2019
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
03 Iran's crude oil exports are confusing, OPEC+ resumes production are like walking on thin ice
Looking back on history, we believe that at this point in time, the current pattern of the crude oil market has many similarities with the pattern in 2018. In the future, the market's focus may return to the recovery of crude oil supply in countries such as Iran, Venezuela. In 2018, the internal and external markets continued to rise in the first three quarters of the year and peaked in early October. Then the price fell rapidly and sharply, completely giving up the annual increase and continued to fall. Finally, the trend gradually stabilized as OPEC+ cut production again. In this process, crude oil prices ushered in a sustained rise in the implementation rate of OPEC production cuts and a significant decline in global inventory, as well as the US claiming that it formally imposed sanctions on Iran in November of that year. However, in October of that year, with the United States announcing the exemption of the eight largest Iranian crude oil importers, this practice completely broke the market's expectations of future supply shortages. During the same period, oil-producing countries that adjusted their output plans for future supply shortages increased a large amount of production, resulting in a large supply surplus. At the same time, as the previously high oil prices significantly suppressed crude oil demand, coupled with the autumn maintenance of refineries in the Northern Hemisphere and the weak macroeconomic data, the expectations for future demand weakened sharply, crude oil prices fell all the way, causing the market to panic to recover the year-round increase, and even set the longest consecutive decline record and the largest single-month decline record in recent years.
Figure 15 The main trend of crude oil futures in 2018 (2018.01-20178.12)
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
Although history cannot repeat all the details, judging from the current level of crude oil prices and the feedback from the crude oil market to the supply side, OPEC+'s performance on the supply side will continue to become the focus of market attention for a long time in the future. Among them, the Iranian issue and Venezuela issue may once again affect the nerves of the crude oil market. As early as December last year, Iran unilaterally announced that it would increase crude oil production to 4.5 million barrels per day from March 2021, and increase crude oil exports to 2.3 million barrels per day during the same period. After Biden took over the White House in , the market has strong expectations for the easing of US-Iran relations, and the United States' previous sanctions on Iran's crude oil export embargo may also be lifted. Therefore, we believe that the market is likely to speculate on the problem of a significant recovery in Iran's crude oil supply under the expectation of easing US-Iran relations. Although the market expects the recovery of Iranian crude oil supply to be formed as early as last year, with the continuous improvement of the supply and demand side of the global crude oil market in the post-epidemic era, the supply and demand side of the crude oil market will inevitably gradually turn into a tight balance in the future. Therefore, in the future, oil prices will be very sensitive to changes in output from 500,000 to 1 million barrels per day. In this process, we may see that the market continues to form expected gaps based on the recovery of Iran's crude oil supply, such as the pace of Iran's crude oil supply recovery, the real supply recovery capacity, and the attitude of OPEC+ toward production adjustment after Iran's supply recovery. As for the recovery of Venezuela's crude oil supply, this problem is relatively simple, because the previous shortage of Venezuela's crude oil supply was not entirely caused by the embargo under US sanctions. The decline in capital expenditure on crude oil production under long-term internal affairs and economic chaos determines that its capacity recovery is very poor. However, as mentioned above, since the current global crude oil market is gradually becoming tightly balanced, the high oil prices are very sensitive to slight changes in the supply side, so this issue is also worth paying attention to again in the future.
In terms of OPEC+'s production adjustment, the production recovery rate of OPEC+ has slowed significantly since January 2021. This slowdown originated from OPEC+'s original production increase plan on the one hand, and from the uncertain pace of economic recovery on the other hand. We see that in the last four OPEC+ meetings since December last year, OPEC+ increased its production by 500,000 barrels per day, 75,000 barrels per day, 75,000 barrels per day and 76,000 barrels per day in January-April 2021 respectively. Among them, the increase in production from February to April all originated from Russia and Kazakhstan, and Saudi Arabia individually reduced production by an additional 1 million barrels per day in February to April. It is not difficult to find from this set of data that since February 2021, OPEC+ will actually maintain a monthly production cut of about 900,000 barrels per day compared to January, which is also an important reason that supports the continued strengthening of oil prices. Therefore, if Saudi Arabia is not willing to give up its short-term market share and additional production cuts to support oil prices, the current level of oil prices is likely to not reach its current height at all. Considering the certainty of the future economic recovery trend, Saudi Arabia is likely to no longer implement an additional 1 million barrels per day while crude oil demand is gradually recovering, and OPEC+'s crude oil production will also gradually recover sooner or later. However, considering that there is still a potential recovery of about 5 million barrels per day compared to the potential recovery of production capacity before the outbreak of the epidemic, and referring to the oil price trend from October to November 2018, the short-term surge in supply is likely to cause all the efforts made by OPEC+ to support oil prices to be wasted. Therefore, as long as the production resumption plan reached at any OPEC+ meeting in the future is slightly radical, the supply increase in the crude oil market will be huge, and the negative for oil prices will be fatal. Considering that the current foreign oil prices are far from reaching the high of around US$80 per barrel in 2018, once the supply recovers too quickly or Iran's crude oil production recovers rapidly in the short term, it may force oil prices to repeat the mistakes of 2018 and take back all the gains. What's more, the current demand for crude oil has not yet truly recovered, and the strengthening of oil prices partially reflects the market's inflation expectations. In the case of , it is crucial to see what rhythm the Saudi-led OPEC+ will choose to increase production at.The difficulty lies in the fact that once the U.S.-Iranian relations ease, causing a large amount of Iranian crude oil to resume exports, how Iran and other OPEC+ member states will allocate their market share will be a problem facing Saudi Arabia. Therefore, we believe that the market will continue to focus on OPEC+'s statement on supply for a long time in the future, and OPEC+'s voice will be enhanced again. This is not because OPEC+ still has the strength to bring oil prices to new highs, but more because the risk of internal discrimination in OPEC+ is rising under the geopolitical game. If you are not careful, it may cause the collapse of oil prices.
Figure 16 OPEC crude oil production Unit: thousand barrels/day
Source: Bloomberg, Guotai Junan Futures Industry Service Research Institute
04 Summary
From the trend of oil prices since February, as oil prices continue to approach the high before the outbreak of the epidemic, the market is already very sensitive to changes in the supply and demand side of crude oil, and major mainstream institutions around the world have also had major differences on the future trend of oil prices. Considering that the rapid rise in the yield on the 10-year U.S. Treasury bonds over the past week has triggered a sharp pullback in U.S. stocks and even global stock markets, the market's recent attention to oil prices, which are closely linked to inflation expectations, has increased again. At this sensitive moment, considering that the pace of crude oil demand recovery has gradually become clear under the control of the global epidemic, we believe that the direct impact of the short-term recovery speed on oil prices is likely to be significantly weakened compared with previous ones. The focus of market transactions will return to the supply side dominated by OPEC+, and its influence on oil prices will far exceed that of the US shale oil and other non-OPEC+ oil-producing countries. The issue of Iran and Venezuela's crude oil recovery, which is closely linked to, may be pushed to the forefront by the market again. After continuing to rely on supply shrinkage to support oil prices, will Saudi Arabia continue to reduce output by 1 million barrels per day in the future? Will OPEC+ still reach an unexpected production cut decision like this meeting in the future? With the rekindling of war in the Middle East, is there really a timetable for the recovery of Iran's crude oil exports? We believe that in the future, OPEC+ will continue to regain its previously lost market share with the help of increasing production, and it will also regain its voice in the global crude oil market, and the geopolitical attributes of crude oil will also be enhanced again.
This article is from Kansai Bulk
