(report producer/author: Guojin Securities, Xu Junyi, Chen Lulou)
1. The off-season crude oil inventories are relatively low, and the supply is tight and difficult to change
The global new oil and gas discovery resources continue to decline rapidly. From 1900 to the present, we have found that the new exploration reserves in 2021 were the lowest in the past 75 years. In 2021, the global new oil and gas exploration reserves were 6.756 billion barrels of oil equivalent, the lowest level since 1946. Globally, this indicator shows a continuous downward trend, which represents the continued decline of global oil and gas development funds' willingness to invest in oil and gas exploration and newly discovered resource capacity. Under the global " carbon neutrality " trend, the probability of restoring exploration expenditure in previous years is relatively low. The decline in new exploration reserves may continue to cause insufficient marginal increase in the supply side.
The current marginal increase in crude oil supply mainly comes from the United States and OPEC+ production increase and IEA member states release reserves. Although crude oil supply has increased, the fundamentals of global crude oil supply tightness have not changed due to the continued recovery of foreign travel and the improvement of the domestic epidemic. June-September is the traditional peak season for refined oil consumption. It is not the season with the strongest demand for refined oil. However, the US refined oil tanks have seen a relatively abnormal decline while the refinery operating rate remains high. In addition to crude oil, the supply of refined oil is also tight. For a long time, there has been a clear negative correlation between US crude oil inventories (including strategic reserves) and WTI crude oil price . With the arrival of the traditional peak consumption season for refined oil and the implementation of the largest historical release of reserves in the United States, US crude oil inventories (including strategic reserves) may further decline, and oil prices are more likely to rise further than expected.
Since March 2022, the price spread of refined oil in the US market has continued to widen, the gasoline cracking spread is close to historical highs, and the price spread of diesel and aviation kerosene has hit a new high. On the one hand, the rise in refined oil prices is driven by the rise in crude oil prices, and on the other hand, the rapid expansion of cracking price spread shows that the supply tightness of refined oil itself is also an important factor driving price increases.
1.1. The peak season for refined oil consumption is coming soon, and supply tension may intensify
Recently, the domestic epidemic has gradually improved, and oil demand is expected to continue to recover. At the same time, with the end of maintenance of some refineries, the operating rate of Shandong local refineries has reversed the downward trend since November 2021, and the domestic supply of refined oil and demand for crude oil are expected to improve.
Many overseas countries have relaxed epidemic prevention policies and residents' travel continues to recover. We calculated the marginal increase in gasoline and diesel consumption in five countries in the United States, Brazil, , Europe, Japan and India compared with January-April. Taking the United States as an example, the United States' crude oil consumption in January-April and June-September 2021 was 18.86 million barrels per day and 20.29 million barrels per day, respectively. The U.S.'s annual consumption of gasoline and diesel accounted for 64%. The estimated gasoline and diesel consumption in January-April and June-September 2021 was 12.03 million barrels per day and 13.07 million barrels per day. The travel index of various countries was tracked through exclusive satellite big data. The U.S. travel index increased by 9.42% year-on-year from January-April and June-September 2022. Assuming the same year-on-year increase in June-September, the estimated gasoline and diesel consumption in January-April and June-September 2022 was 13.16 million barrels per day and June-September 2022, respectively 14.30 Million barrels per day. The final estimate is that gasoline and diesel consumption in five countries in the United States, Brazil, Europe, Japan and India will increase marginally by 2 million barrels per day from June to September. (Report source: Future Think Tank)
European and American flights recovered well in 2022, driving the growth of demand for aviation kerosene. We calculated the marginal increase in U.S. and European aviation kerosene consumption in June-September compared with January-April. Taking the United States as an example, the US crude oil consumption in 2021 was 19.77 million barrels per day, and the annual air kerosene consumption accounted for 7%, which can be obtained by weighting the annual air kerosene consumption by the proportion of flights per month as the proportion of flights per month. Among them, the consumption in January-April and June-September 2021 was about 0.82 million barrels per day and 1.65 million barrels per day, respectively.The number of flights in the United States increased by 31.55% year-on-year from January to April 2022, and assuming that the year-on-year growth rate remained unchanged in June to September, the estimated airline kerosene consumption in January to April and June to September 2022 will be 1.46 million barrels per day and 2.02 million barrels per day, respectively. It is finally estimated that European and American aviation kerosene consumption will increase marginally by 1.44 million barrels per day in June.
1.2. Oil and gas companies have a low willingness to spend capital, and the US medium- and long-term crude oil production is limited. Based on traditional cyclical logic, the market believes that maintaining a high crude oil price will significantly stimulate oil companies to increase capital expenditure, thereby promoting the increase of crude oil production. However, we need to emphasize in particular: the timetable for EU 2030 carbon reduction 55% and the policy of "banning the sale of fuel vehicles around 2030" in key economies is largely equivalent to announcing the "dead period" of specific energy varieties, resulting in oil companies' capital expenditures mainly used to accelerate the conversion of stock capacity into production (accelerating the consumption of inventory wells), rather than focusing on medium- and long-term capacity construction. We believe that the tight supply and demand of crude oil cannot be reversed in the medium and long term. Since 2020, due to a series of impacts such as the epidemic and the sluggish terminal consumption, capital expenditure of oil companies has dropped sharply. Capital expenditure has dropped from about 100% to 40% in operating activities. Crude oil prices have risen from 2021 to 2022. After the cash flow of US shale oil companies have improved significantly, they did not vigorously increase capital expenditure, but have significantly reduced the leverage of enterprises and increased shareholder returns, and their willingness to spend is insufficient.
In 2021, the net cash flow of major shale oil companies' financing activities showed a large-scale outflow. On the one hand, the cash flow of shale oil companies to repay long-term debts has increased year by year. On the other hand, the shale oil and gas industry has increased its shareholder return expenditure. With the continuous rise in crude oil prices in 2021, the cash flow (the sum of dividends and corporate repurchases) used by US shale oil companies for shareholder return increased significantly, reaching the highest level in nearly 11 years. Therefore, after the rise in oil prices promotes the abundant cash flow of shale oil and gas enterprises' operating activities, reducing leverage and increasing shareholder returns have become the priority choice for shale oil enterprises.
We have counted the capital expenditure budget and output indicators of core shale oil companies and comprehensive oil companies in 2022 (some companies have not disclosed data yet, and the number of sample companies is slightly different from the previous article). In the current high oil price environment, the increase in capital expenditure of oil companies is relatively limited, and the increase in capital expenditure of is higher than the increase in crude oil production indicators. Reducing leverage and increasing shareholder returns are the priority choices for shale oil companies in the scenario of a sharp increase in cash flow in operating activities, which is also consistent with the capital discipline of core shale oil companies. The increase in the capital expenditure guidance of comprehensive oil companies in 2022 is greater than the output guidance, which may mean that comprehensive oil companies will increase investment outside the oil and gas industry.
As the energy transition is imminent, investors require oil and gas company management to control investment in the oil and gas industry and increase returns to investors. According to a survey by the Dallas Fed, nearly 60% of oil and gas company executives believe that "the pressure on investors to maintain capital discipline" is the reason why mining activities have not increased rapidly after rising oil prices. Major shale oil and gas companies have stated in their latest annual reports and investment guidelines that they will implement strict capital discipline, control new investments in the oil and gas industry, use cash to maintain a healthy balance sheet, and increase returns to investors.
The Permian production area, the largest crude oil producing region in the United States, has dropped to its 2016 level and the downward trend has not ended. The oil and gas production in the Permian production area has declined. Compared with the average new well production output of each crude oil driller in 2021, which is about 1,500 barrels per day and the average new well production of natural gas driller is about 3,300 thousand cubic feet per day, its current average new well production has declined by about 26% (oil) and about 34% ( natural gas ). We believe that the decline in oil and gas production of new shale oil and gas wells in the United States mainly comes from the decline in the comprehensive resource grade of the new wells. It reflects the rapid consumption of the best-grade blocks in order to quickly recover cash flow after the epidemic.With the consumption of high-grade assets and the number of inventory wells decreased, the potential increase in shale oil and gas may continue to fall below expectations until the increase in capital expenditure is significantly greater than the grade decline. (Report source: Future Think Tank)
Amid the rapid consumption of inventory wells and the steady increase in the number of newly put into production wells, the U.S. crude oil supply has actually continued to increase, but the growth has continued to fall below expectations. According to the forecast of U.S. Energy Information Administration EIA, the average U.S. crude oil production from June to September 2022 will be 12.03 million barrels per day, up 557,500 barrels per day from the average from January to April, with a relatively limited increase.
1.3. The increase in production has been insufficient to meet the quota many times. OPEC has obvious demands for high oil prices
OPEC+ member countries are not willing to increase production, and there is uncertainty in the marginal increase in actual output. After OPEC+ implemented a new round of production cuts in 2020, OPEC crude oil production and export volume decreased, and is still lower than the production and export levels in 2019. This round of production cuts began in May 2020 and is expected to end in September 2022. The OPEC+ benchmark quota before production cuts was 43.853 million barrels per day, of which the OPEC10 quota was 26.683 million barrels per day; the OPEC+ production quota decreased by 9.7 million barrels per day from May to July 2020, and the scale of production cuts was the largest in history. In May and June 2022, the OPEC+ production quota was 42.126 million barrels/day and 42.558 million barrels/day respectively. The monthly production quota was restored by 432,000 barrels/day in May and June. It is expected that the monthly recovery quota will also be maintained from July to September, with production quotas of 42.99 million barrels/day, 43.422 million barrels/day and 43.853 million barrels/day respectively. In the 19th OPEC+ Ministerial Meeting in July 2021, OPEC+ plans to increase the benchmark production quota of member countries from 43.853 million barrels per day to 45.485 million barrels per day in May 2022, but according to the current OPEC+ quota recovery rate, the OPEC+ production quota can be restored to the original benchmark quota of 43.853 million barrels per day instead of the new benchmark quota of 45.485 million barrels per day.
In the early stage of this round of OPEC+ production cuts, the execution rate of production cuts in many countries was less than 100%, but under OPEC+'s promotion of compensatory production cuts and tough attitude, member countries basically reached 100%+ production cuts. Recently, OPEC10 has insufficient willingness to increase production. In the 9 months from August 2021 to April 2022, the output growth rate of OPEC10 in 6 months was lower than the quota growth, and the output increment in 9 months was 324,000 barrels/day lower than the quota increase. In April 2022, OPEC10 production was 24.464 million barrels per day, and the production quota was 25.315 million barrels per day, and there is still a surplus production quota of 851,000 barrels per day. Although OPEC+ will resume production quota of 432,000 barrels per day from June to September, the actual monthly increase in production is difficult to reach 432,000 barrels per day. From June to September, the average OPEC+ production quota was 43.206 million barrels per day, an increase of 2.112 million barrels per day from the January to April average. Judging from the expansion of OPEC10, assuming that 80% of the restored production quota can be converted into actual output, the marginal increase of OPEC+ supply is 1.69 million barrels per day. If Russian crude oil production is damaged, the marginal increase of OPEC+ supply will further decline.
1.4. Although the conflict between Russia and Ukraine slowed down, the long-term sequelae may far exceed expectations.
Russia is one of the most important oil and gas producers. In 2020, Russia's crude oil production was 10.667 million barrels per day, accounting for 12.07% of the global output. Russian crude oil is mainly supplied to Europe and Asia.
Rosneft and Gazprom are Russian oil and gas giants. In 2020, their total output accounts for 51% (crude oil) and 82% (natural gas) of Russia. We find that the total capital expenditure of these two companies has dropped significantly from their historical highs.
On March 11, the EU announced the fourth batch of sanctions against Russia, including the EU will significantly ban Europe from new investment in the Russian energy sector, including investment in energy exploration, production, technology transfer, etc. At present, most of the European and American oil and gas giants have planned to withdraw from the Russian market, while Total Energy, which currently does not plan to completely withdraw from the Russian market, is threatened by NGO lawsuits. Given the current political and financial environment, it is difficult for these international oil and gas giants to sell their assets in Russia at reasonable prices, so they will bear certain losses and further affect their investment enthusiasm.Russian oil and gas projects usually involve foreign capital during development, and the difficulties in project financing after foreign capital withdrawal will also slow down the development speed.
1.5. Release of reserves increases the market crude oil supply, but it still cannot reverse the supply and demand pattern
In the context of the continued tight global crude oil supply and demand, the IEA and the United States have announced the release of reserves. On March 1, the IEA announced the release of 62.7 million barrels of emergency oil stocks in 30 days, equivalent to about 2 million barrels a day. On March 31, the United States announced that it would release 180 million barrels of strategic oil reserves, or 1 million barrels per day, within 6 months, the largest release of reserves in history. On April 1, the IEA once again released 120 million barrels of oil strategic inventory within 6 months, including 60.559 million barrels of inventory in the United States. The 60.559 million barrels of inventory also belongs to the 180 million barrels of reserves announced by the United States on March 31. After excluding the US part, it will be equivalent to about 330,000 barrels per day. Overall, the total size of the IEA two deposits and the United States’ separate deposits reached 300 million barrels, releasing about 2 million barrels per day in March and about 1.33 million barrels per day in April-September. The United States currently has strategic oil reserves of 565 million barrels, and 180 million barrels account for 31.86% of its strategic oil reserves. The current scale of the United States' strategic oil reserves is at a new low since 2002. If 180 million barrels of reserves continue to be released, its reserve size will drop to 385 million barrels, the reserve level in 1984.
According to the U.S. Department of Energy’s reserve release plan, 90 million barrels of total 180 million barrels are scheduled to be released from May to mid-August. Of the 90 million barrels, 50 million barrels will be released from May and June, 1.1 million barrels will be released from June 21 to June 30, and 39 million barrels will be released from July 1 to August 15. On May 13, 2022, the United States' strategic oil reserves fell by 12 million barrels compared with April 29, equivalent to about 25 million barrels per month. Therefore, 25 million barrels of the first batch of released SPRs are expected to be released in June, plus 1.1 million barrels of released from June 21 to June 30, and the United States is expected to release a total of 26.1 million barrels of SPRs, equivalent to 870,000 barrels per day in June. From the overall scale of reserve releases, the average scale of reserve releases between June and September was 1.3758 million barrels per day, the average scale of reserve releases between January and April was 583,300 barrels per day, and the average scale of reserve releases between June and September expanded by 792,500 barrels per day.
1.6. Other oil-producing countries may have insufficient capacity to increase production
Iran plans to increase crude oil production to 4 million barrels per day in March 2022, and will increase crude oil production to 5 million barrels per day respectively in the next 10 years. Iran's crude oil production has dropped sharply after the United States withdrew from the Iran nuclear agreement. Currently, Iran's daily crude oil production is about 2.6 million barrels. Iran's short-term output target is about 1.4 million barrels per day higher than current output, accounting for 1.6% of global output in 2020. Therefore, we believe that if Iran can expand production smoothly, the impact on global crude oil supply will remain limited. Iran's crude oil production in March 2022 was 2.546 million barrels per day, with limited actual output increase.
Iran nuclear negotiations are a key factor in determining whether Iran can successfully expand production and achieve exports, but the prospects for Iran's nuclear negotiations are unclear. At the same time, the number of drilling rigs and completions in Iran have both dropped significantly. The expansion plan for this production is 160 billion US dollars in investment, with investment in oil and gas projects of US$90 billion and US$70 billion respectively. Project investment accounts for 19.15% of its annual GDP. The scale of production expansion makes it difficult to quickly advance this production expansion. (Report source: Future Think Tank)
Currently, Venezuela crude oil production is about 700,000 barrels per day, at a historical low. Due to long-term insufficient investment and sanctions, Venezuela's crude oil production has continued to decline since 2016. The annual output was about 2.4 million barrels per day, and only 560,000 barrels per day in 2021; in 2016, Venezuela had 58 oil and gas well drilling machines, and only 25 left in 2021. Venezuela plans to achieve crude oil production of 2 million barrels per day in 2022, and will increase production to 3 million barrels per day as soon as possible. However, due to the previous feud between Venezuela and the United States, good relations with Russia, and long-term insufficient investment in the Venezuelan oil and gas industry, it is expected that Venezuela's increase in production will still be a long process.
1.7. The marginal increase in supply may cause global crude oil supply and demand to continue to tighten, and oil prices still have room for growth
In the short term, although in June-September, global crude oil supply increased compared with January-April due to the United States' release of strategic inventory and the increase in production of oil-producing countries, the global crude oil supply increased compared with January-April, but as overseas terminal consumption demand continued to recover, and June-September is the traditional peak season for refined oil consumption, the marginal increase in global crude oil demand is greater than the marginal increase in supply. In the short term, the marginal increase in crude oil supply mainly comes from the increase in production of the United States and OPEC+ and the release of reserves by IEA member states. According to our calculations, without considering the damage to Russia's crude oil production, the marginal increase in crude oil supply for each of the above factors in June-September was about 3.04 million barrels per day compared with January-April. On the demand side, we calculated the increase in gasoline and diesel demand in 5 countries and European and American aviation kerosene demand. Compared with January-April, the marginal demand increase in June-September was about 4.2 million barrels per day. Taking into account the above factors, the marginal increase in crude oil demand is higher than the marginal increase in supply, and the supply and demand gap between June and September may reach 1.16 million barrels per day.
In the medium and long term, we believe that even if the situation in Russia and Ukraine eases, the Iran nuclear agreement is reached, the Federal Reserve hikes interest rates, the United States increases its strategic reserves, the epidemic outbreak again, and other situations have led to a decline in oil prices, and crude oil supply and demand continue to be tight in the medium and long term, and the fundamentals of prices rising sharply sooner or later will be difficult to change. Currently, most oil companies tend to reduce the liabilities of and increase shareholder returns in the environment of high oil prices, but their willingness to spend is relatively insufficient. The existing capital expenditure is mainly used for short-term behavior, which is reflected in accelerating inventory well consumption or releasing strategic inventory to increase short-term crude oil supply and being very cautious about medium- and long-term supply increase. At the same time, the "significant carbon reduction in 2030" policy in Europe and the United States has fundamentally curbed the medium- and long-term capacity construction of traditional fossil energy companies. Shale oil is also facing a downward trend in resource grade, which leads to the increase in shale oil production that may be lower than expected in the long term.
2. The off-season increase of refining-related products has far exceeded the increase in oil prices, and the expectation gap is extremely strong
As private large refining and chemical enterprises continue to deploy deep processing projects in the downstream industrial chain, new materials may promote the company's product added value to significantly increase. Against the backdrop that international oil prices will likely remain high, private refining and chemical enterprises start processing crude oil, give full play to the advantages of industrial chain integration, and have the ability to maintain stable product price gaps under high oil prices.
With the arrival of the peak season for refined oil demand and the price rises, it can be used as an oil-dip component. PX is in short supply. Although crude oil prices remain rising in May, the price of PX rises faster, and the PX-crude oil price spread significantly widened in May. By sorting out the price difference of the entire industrial chain of private refining and chemical enterprises, it can be found that from 2022 to the present, the price difference in the upstream PX-crude oil link has rebounded significantly, and the upstream large-scale refining and chemical assets prosperity has increased significantly in the off-season compared with the level at the beginning of the year. The core reason is that the price increase of terminal products is higher than the increase of raw material ends. This trend is different from the market's expectation that the price increase of raw material ends may continue to be reduced.
In the Singapore market, the transmission of crude oil prices to refined oil prices is good. Since March, the cracking spread of refined oil in Singapore has widened rapidly. Currently, Hengyi Petrochemical has a 5.6 million tons of equity crude oil processing capacity, of which refined oil and PX production capacity account for the majority. Hengyi Petrochemical's refined oil is mainly sold to Brunei , other Southeast Asian countries and Australia. Among them, the sales of refined oil to Brunei will be directly signed for sales contracts. The quotation refers to the Singapore market. The sales of refined oil to other countries are mainly sold through the Singapore commodity trading market. Hengyi Petrochemical's refined oil business may fully benefit from the widening of the cracking spread of Singapore's refined oil. (Report source: Future Think Tank)
At the same time, private refining and chemical companies continue to promote deep processing projects, which is expected to continue to increase product added value.After the refining and chemical project is put into production, the world's largest clustered aromatic hydrocarbon production capacity and the world's largest clustered olefin production capacity have the ability to extend downstream to more than 20 scarce new energy sources and semiconductor materials , which has extremely high scarcity worldwide. Driven by the global "dual carbon" policy, the high growth of terminal consumption demand for new energy-related materials is highly certain. Under the upward trend of crude oil prices and coal prices, due to the advancement of private large-scale refining and deep processing projects, the increase in weighted sales prices of terminal products will be reflected one after another. At the same time, due to the possibility of an increase of oil products beyond expectations, the large-scale upstream production capacity of private large-scale refining and chemical companies is expected to achieve profitability.
3. The balanced configuration value of upstream oil and gas extraction and downstream refining highlights
Considering that downstream oil products in refining and chemical products may have profits exceeding expectations driven by the demand for travel in Europe and the United States, the profits of their configuration value have been significantly improved. At the same time, we observed that the structure of holdings of 's energy stock is also a consideration of upstream and downstream, which is worth referring to. As of the end of 2021, only one energy stock held by Berkshire Hathaway, Xue Froun . In the first quarter of 2022, Berkshire Hathaway, a subsidiary of Buffett, significantly increased its allocation to oil stocks in 2022Q1. Chevron became its fourth largest holding stock, and Occupy Oil also obtained a position building and became its eighth largest holding stock. It increased its holdings of 121 million shares in Chevron, with a total holding market value of approximately US$25.9 billion, and its position of reached 7.01%, accounting for 8.17% of the company's total share capital; it increased its holdings of Occidental Oil Company by 226 million shares in the first quarter, with a total holding market value of approximately US$13.2 billion, accounting for 24.21% of the company's total share capital.
In terms of upstream oil and gas production, Chevron achieved crude oil production of 563.195 million barrels, NGL production of 98.915 million barrels and natural gas of 281.3785 billion cubic feet; Occupy Oil achieved crude oil production of 226 million barrels, NGL production of 91 million barrels and natural gas of 649 billion cubic feet. In terms of mid- and downstream products, SnowFron's mid- and downstream products mainly include refined oils and chemical products, and chemical products are produced by CPChem Chemical Company, a subsidiary with a 50% stake. Chevron's refined oil production in 2021 was 588 million barrels. CPChem Chemical's main products include olefin , polyolefin and styrene compounds, etc.; Occupy Petroleum's downstream products are mainly basic chemicals and ethylene products of its Western Chemical Company.
According to the downstream product production capacity of Chevron and Occupy Oil and Berkshire Hathaway, the upstream equity oil and gas production of Berkshire Hathaway is about 26.93 million tons of oil equivalent, and the downstream refined oil equity production and refining and chemical product production capacity are about 3.72 million tons and 1.87 million tons respectively. It can be seen that the equity position held by Berkshire Hathaway is not simply upstream mining business, but still includes some downstream refining and chemical assets. Compared with pure upstream assets, the allocation has a certain balance. We believe that with the peak travel demand season for various oil products in the refining and chemical industry, prices may rise beyond expectations, and the upstream and downstream configurations can be taken into account. The prices of products in different links of the refining and chemical industry chain will rise in synchronization, and stabilize profit fluctuations.
(This article is for reference only and does not represent any of our investment advice. If you need to use relevant information, please refer to the original text of the report.)
Selected report source: [Future Think Tank] Future Think Tank - Official website
