As of March 25, Brent, WTI and SC crude oil futures rose by about 45% this year. In mid-March, the supply interruption panic caused by the US and UK energy sanctions decision on Russia once made the most affected Brent increase reach a maximum of 78%. Oil prices have achieved such performance, which directly pushed the US inflation rate to a 40-year high, and is likely to continue to rise. Europe and Canada inflation is also rapidly rushing to this goal. A series of sanctions have not only hit the Russian economy hard, but other regions around the world, especially Europe, have also been under tremendous pressure.
Oil prices performed very extremely. The reason why they deviated from the original market rhythm was because of the super incident of the Russian-Ukrainian military conflict. Immediately afterwards, the United States and its allies jointly imposed the toughest sanctions on Russia in history. The Russian president said that "the United States launched a financial war against Russia from the economic field." There is no doubt that Russia's economic recession is inevitable, and Europe is also facing huge damage caused by soaring energy prices due to sanctions by Russia. At present, many European countries have begun to experience strikes, demonstrations and other incidents, and governments of various countries have been under tremendous pressure to protect the economy and people's livelihood.
Although many professionals have noticed that after nearly two years of continuous destocking, global crude oil inventories are at a low level, and insufficient upstream investment has led to fragile supply for several consecutive years, in this context, the risks brought by geopolitical factors may become an important influencing factor in 2022. However, relations between Russia and Ukraine deteriorated rapidly and rose to the level of military conflict, which few people could expect. Subsequently, the extreme sanctions that the United States and its allies almost quarantine Russia from the world were far beyond expectations. The situation was developing too quickly, and oil prices staged an extreme market performance. In just 6 trading days, it quickly rose from below $100/barrel to the historical high of $139/barrel, and there was a violent oscillation of $19/barrel on that day, and fell back below $100/barrel in the following six trading days. This trend scared investors. The last time the oil price rose to around $140 per barrel was in 2008 14 years ago. Many investors had not experienced such high oil prices and were unable to cope with such performance. Therefore, the trading volume of the crude oil market has shrunk rapidly after refreshing history. The trading volume of the crude oil market in the latest week is less than half of what it was half a month ago, and the market is full of wait-and-see sentiment.
No one likes this situation and hates the risks brought by this uncertainty. Many signs show that investors are physically and mentally exhausted. At present, the supply and demand situation in the crude oil market still faces the influence of many factors. With Ukrainian President Zelensky signing a presidential decree to extend Ukraine's wartime state for another 30 days from March 26, this means that the geopolitical incident of the Russian-Ukrainian conflict will still become the focus of market attention in the future. The market is still paying close attention to the reduction in Russia's crude oil supply and whether other suppliers can work hard to fill this gap. Faced with an environment like the crude oil market, investors' assessment of oil prices has also maintained a high degree of flexibility.
inventory has not yet reached a turning point, indicating that the supply and demand tension is still continuing
As a variety with a relatively stable supply and demand structure, it is rare for the supply and demand structure of the crude oil market to undergo rapid changes in the short term, especially for situations like the first quarter of 2022, which are even more rare. At the end of last year, the market was still worried that the epidemic prevention and control of the epidemic was dragged down by the strong transmission power of Omickron , which led to the emergence of oversupply. When OPEC conducted analyses on the supply and demand of crude oil market at several monthly meetings, it gave the conclusion of oversupply in the first quarter of this year, and used this as a tough reason for not increasing additional production. But soon the market no longer worry about this. Data from January to February showed that global crude oil supply is still tight. Monthly reports from the three major institutions showed that global crude oil inventories continued to decline, which means that the market itself is in a tight balance between supply and demand. After the United States led its allies to extend sanctions against Russia to the energy field, how to solve the resulting Russian oil supply gap of 2 million to 5 million barrels per day has become a big problem.After the United States and its allies imposed sanctions on Russia's energy sector, OPEC said that the global production capacity is not enough to fill the entire gap in Russia's roughly 7 million barrels per day crude oil and product exports, and those exports may be cut off once the ban takes effect. "The world simply does not have such capabilities - the problem now is not market share , but how we can alleviate and overcome this crisis," said OPEC Secretary-General Barkindu.
Russian energy exports are blocked in a serious situation
According to the information currently summarized, on March 8, US President Biden announced that the United States will ban the import of Russian energy. The United States will provide 45 days for the fulfillment of the existing contract. The United States said it will gradually stop Russian oil imports by the end of this year. The suspension of imports by these two countries will probably reduce the demand for Russian crude oil and refined oil by 900,000 barrels per day. EU is also beginning to consider imposing an oil embargo on Russia. Although Russia has repeatedly warned that some EU countries will suffer little loss to the United States, it will cause heavy blows to European countries. There are also obvious differences within the EU. Among them, German Chancellor Scholz clearly stated that Germany does not support the energy embargo on Russia, but a consensus has been reached within the EU on accelerating the removal of Russia's energy dependence. On the evening of March 25, French President Macron reiterated the EU's principles on responding to the Russian-Ukrainian conflict after attending the EU Leaders' Summit in Brussels, Belgium: to impose severe sanctions on Russia, and the EU must get rid of its energy dependence on Russia. The German Minister of Economic Affairs also said on March 25: "Germany has made great progress in energy security. In the past four weeks, it has managed to reduce coal and oil imported from Russia, and its dependence on Russian coal has dropped from 50% to 25%, and its share of oil imports has dropped from 35% to 25%. Hopefully, before the summer, we will import natural gas from Russia to 24%. "He also said that the purpose of reducing energy imports from Russia is to force Putin to stop the war.
In 2021, exports of 10.1 million barrels per day of crude oil and condensate oil produced by Russia accounted for more than 45%, that is, 4.7 million barrels per day. According to the Russian export statistics and partner countries' import statistics released by GlobalTrade Tracker, in 2021, the Netherlands and Germany imported a quarter of the total export volume of Russian crude oil and condensate, that is, 1.1 million barrels per day. In 2021, Russia exported about 199,000 barrels of crude oil to the United States every day, accounting for about 4% of Russia's total crude oil exports that year. A summary of the above information shows that in addition to the United States and the United Kingdom clearly imposed sanctions on Russian energy, the EU will also reduce its imports to Russian oil in the next time, with a decrease of 20%-50% in the short term, which means that the United States and its allies will reduce oil imports to Russia, including crude oil and refined oil, by about 2 million to 4 million barrels per day.
Other crude oil supply sources Outlook
From the current knowledge of major trading companies in the world, the current decline in Russian oil supply is between 2 million and 3 million barrels per day. This urgently requires other crude oil producers to work hard to increase production to fill this gap. Although data in OPEC's monthly report shows that Iran, Libya, , and Venezuela's production rebounded significantly, OPEC's oil production increased by 440,000 barrels per day in February to 28.47 million barrels per day. However, OPEC+'s actual output is still 1 million barrels per day lower than planned output. In addition, the United States, the world's largest crude oil producer, hardly increased its crude oil production throughout the first quarter, maintaining its 11.6 million barrels per day. This has not eased the supply tension in the crude oil market.
Since March, member states such as the UAE, Libya have called on OPEC to increase crude oil production. At present, Saudi has not made any statement on this and emphasized that it will maintain direct cooperation with Russia. However, there is news that Saudi Aramco expects global crude oil demand to continue to rise, and said that the company's capital expenditure will increase to US$40 billion to US$50 billion in 2022. In 2021, the profit of Amerika increased to US$110 billion. With the increase in crude oil price and output, Saudi Aramco will reach US$140 billion in 2022.Saudi Aramco hopes to increase its maximum sustained capacity from 12 million barrels per day to 13 million barrels per day by 2027, and increase gas production by more than 50% by 2030. In addition, the UAE itself has relatively abundant idle production capacity and has the potential to increase production of 500,000 to 800,000 barrels per day. Judging from the current UAE attitude, as long as Saudi Arabia makes a clear offer, it is a high probability that its rapid production increase will be a high probability event.
In addition, the market is also paying close attention to the possible lifting of sanctions on Iran and Venezuela to increase crude oil supply. On March 23, U.S. National Security Adviser Sullivan said that although the problems remain and it is unclear whether these issues will be resolved, the United States and its allies have made progress in Iran's nuclear negotiations. Iranian Foreign Minister Abdullahyan said that Iran and the world's major powers are closer than ever to the recovery of the 2015 nuclear deal. The IEA judges that if the Iran nuclear agreement is reached, oil exports may increase by about 1 million barrels per day within 6 months, but this may take several months. Iranian Oil Minister Jawad Aoji said on the 19th that Iran plans to increase crude oil and condensate exports from 1.2 million barrels per day to a maximum of 1.4 million barrels per day according to annual budget , and plans to increase crude oil and condensate production capacity. Aoji told Iran's state television that the Iranian Ministry of Petroleum plans to increase crude oil and condensate production capacity from 3.7 million to 4 million barrels per day to 5.7 million barrels per day, but he did not disclose a timetable for achieving this goal.
Although the U.S. crude oil production did not make efforts in the first quarter disappointing the market, and the market also doubted whether U.S. crude oil can effectively increase its production, the IEA has always had high expectations for the recovery of U.S. crude oil production. EIA will further increase the growth of U.S. crude oil production in 2022 in the short-term energy outlook in March. It believes that as oil prices rise, U.S. crude oil production is expected to grow by 850,000 barrels per day. A survey of oil executives released by the Federal Reserve Bank of Dallas showed that activity in the U.S. oil and gas industry accelerated in the first quarter as corporate outlook improves. According to reports, the survey was conducted in mid-March, with 141 oil and gas companies, of which 91 are exploration and production companies and 50 are oil field service companies. The EIA report said that U.S. shale oil production in April will increase by 117,000 barrels per day, reaching 8.708 million barrels per day, the highest since March 2020, and U.S. Permian oil production is expected to rise to an all-time high in April.
The impact of high oil prices on demand
The focus of the market is on the supply side. The specific supply changes in Russia and other crude oil suppliers are always provoking investors' nerves, and oil prices may fluctuate significantly at any time. In fact, over time, the Russian-Ukrainian conflict has not only had a major impact on the commodity supply chain, but also had an increasingly greater impact on global economic development. After the oil price rose, its potential impact on crude oil market demand has gradually attracted the attention of some institutions, believing that oil prices will curb demand after they are above US$125 per barrel. However, some institutions have found that high oil prices will not lead to a decline in demand soon through long-term tracking of the market, especially since crude oil demand is gradually recovering from the epidemic worldwide, and the decline in crude oil demand may not be as large as expected. US Treasury Secretary Yellen said recently that rising oil and commodity prices will damage global economic growth. OECD assesses the impact of the Russian-Ukrainian conflict and sanctions on Russia, which may lead to a reduction in the growth rate of global economic by 1 percentage point. The damaged economic outlook forced major institutions to lower their crude oil demand growth expectations in 2022. The most representative one is that the IEA lowered the forecast of world oil demand from the second quarter to the fourth quarter of 2022 by 1.3 million barrels per day, and lowered the forecast of global oil demand growth in 2022 by 950,000 barrels per day to 2.1 million barrels per day, an average of 99.7 million barrels per day. However, the IEA believes that Russia's crude oil exports are more affected, so the crude oil market is still facing tension. The IEA judged that oil prices may rise sharply in the next few months and proposed suggestions that it could reduce oil use in transportation and required people to drive less and fly less to curb their dependence on Russian oil. By changing transportation patterns and consumer behavior, global oil demand could be reduced by 2.7 million barrels per day in four months, the IEA said.
Geographical factors will continue to put pressure on oil prices
The situation facing the supply side has made investors anxious. The impact of the Russian-Ukrainian conflict has made it difficult for the market to cope with, and the Middle East is not peaceful. Data shows that Yemen's Houthi attacks are becoming more and more frequent. In the past period of time, Yemen's Houthi armed forces have frequently carried out a series of attacks on countries such as Saudi Arabia, the UAE, and Iraq . Previously, the Saudi Foreign Ministry had just issued a written statement saying that in the context of the ongoing attacks on Saudi oil facilities by Yemeni Houthi armed forces, Saudi Arabia will not be responsible for any oil shortages in the international energy market. On March 25, Houthi armed again fired missiles and drone at Saudi Aramco's facilities in Jeddah . The shells fired from Yemen hit a distribution station in Jizan Province in southwestern Saudi Arabia and caused a fire, which promoted the rapid rise of oil prices short-term . Against the backdrop of tight supply, any geopolitical factors that are unfavorable to supply will stimulate oil prices to rise. Saudi Arabia stressed that the Houthi attacks on oil and gas production facilities in Saudi Arabia will not only affect the production capacity and compliance capacity of Saudi Arabia's energy industry, but will also threaten the security and stability of energy supply in the global market. It also called on the United States to take more actions to help deal with the Houthi attacks.
The complex environment faced by the crude oil market in the first quarter of 2022 is a rare situation in many years. Many influencing factors have led to a significant increase in oil price fluctuations and are becoming increasingly difficult to control. On March 25, oil prices went back and forth between nearly US$4 per barrel, which is a typical reflection of the current market status.
The situation between the West and Russia is becoming irreversible. It is already underway to see major changes in the supply and demand pattern of the crude oil market and even the entire global energy market. The subsequent side effects of high oil prices may have far-reaching impacts. While putting pressure on economic development, it will also promote countries to accelerate the energy transformation process. The pattern of high-level oscillation of oil prices has been formed, and there are still many factors that affect oil prices. The core is to look at the changes in the supply of Russian crude oil due to sanctions. It will take some time for the crude oil market to stabilize. Before this, it will take many efforts to alleviate the tight supply of the crude oil market. The IEA is planning a new round of 60 million barrels of oil reserves. It is also something global consumers are looking forward to increasing supply, and before this, oil prices are likely to remain at a high level. We do not want oil prices to get out of control and hit historical highs, but we still need to maintain a clear understanding and a sense of crisis. (Author’s unit: Haitong Futures )
This article is from Futures Daily
