At the beginning of 2022, the OPEC+ meeting planned to continue to release 400,000 barrels/day of crude oil production capacity in February. However, international crude oil prices have performed strongly, with a strange phenomenon of rising prices as production increases. Regardless of the black swans and gray rhinos in the short- and medium-term crude oil market, the long-term trend of oil prices has already been clearly reflected in the supply and demand balance sheet. It can be said that all fluctuations have cause and effect, but the outcome is already determined.
A firm and orderly exit from production cuts
OPEC and its allies held the 24th Joint Ministerial Meeting (JMMC) via video. In view of the consensus on crude oil fundamentals and market outlook expectations, the organization will continue its previous production policy and increase crude oil production by 40% in February 2022. Thousands of barrels/day. In addition, OPEC+ reaffirmed the discipline of member states to abide by the agreement, and it is still necessary to compensate those who failed to achieve their goals, emphasizing the need to exit the production restriction framework in an orderly manner.
According to an internal report issued by OPEC’s research department and evaluated by the Joint Technical Committee, the outlook for the crude oil market this year does not seem so pessimistic. On the one hand, in view of the shrinking investment in the traditional energy industry, the supply capacity of major competitors has weakened; on the other hand, OPEC+ believes that the impact of the Omicron strain is mild and short-lived, and the world is better able to cope with the challenges posed by the new coronavirus epidemic. However, OPEC also emphasized that the oversupply situation may become more serious later in 2022, and it may choose to suspend or even reverse the production increase plan if necessary.
After experiencing a serious surplus in the first quarter of 2020, under the combined influence of OPEC+’s largest production cuts in history and the global economic recovery from the epidemic, the crude oil market has been rebalancing with tight supply and demand for the past year and a half, supporting this trend. A stable and long-lasting bull market. However, as OPEC+ maintains its policy of increasing production by 400,000 barrels per day month by month, and the dividends from the rebound in demand in the post-epidemic period have been exhausted, the supply and demand gap is gradually narrowing and even turning back into surplus.
OECD fulfills its de-banking target
The Organization for Economic Co-operation and Development (OECD) crude oil inventory is the core reference for OPEC+ to formulate and adjust production reduction plans. Looking back at when OPEC+ began to implement production cuts in 2017, the goal was clearly to return OECD crude oil inventories to the five-year moving average. Now, both OECD and U.S. crude oil inventories have fallen below the five-year average.
EIA statistics show that the global crude oil market will basically maintain a state of comprehensive destocking in 2021, and this trend even extends to early 2022. According to the deduction of the OPEC+ Joint Technical Committee (JTC), the current OECD crude oil inventory is still at a low level. With the United States and others releasing strategic oil reserves, the inventory level in the first three quarters of 2022 will still be lower than the 170 million barrels in the same period from 2015 to 2019. . Based on predictions of low crude oil inventories and shrinking oversupply, OPEC+ made the decision to increase production by 400,000 barrels per day.
Many countries are unwilling to expand production
OPEC+ decided to continue to maintain the current production increase plan, but the production capacity utilization of some member countries has reached a bottleneck, and it remains to be discussed whether the overall production increase potential can be fully released. Saudi Arabia showed stable and efficient production mobilization capabilities during the price war in early 2020, which gave us the impression that OPEC was imposing orders and prohibitions. However, many oil-producing countries have reached or are close to production limits, making it difficult for OPEC+ to fulfill its commitment to increase production.
In Africa, oil fields and port facilities in Libya and Nigeria are in disrepair, and poor infrastructure has led to force majeure in oil production and large-scale interruptions. In South America, Venezuela, which has the world’s largest proven oil reserves, is helpless in the face of U.S. sanctions and economic collapse. Its oil companies are heavily in debt and lack drilling equipment. In the Middle East, if the negotiations on the Iranian nuclear issue fail to achieve substantive results, the return of Iranian crude oil in large quantities is still far away. Only Gulf countries such as Saudi Arabia, Kuwait and the United Arab Emirates have the ability to quickly increase production, but the remaining excess crude oil production capacity will also be exhausted. If there is no return of larger production capacity in the later period, the gap between the actual supply of crude oil and the target level may further widen.
Asian demand expected to pick up
When the global epidemic situation is severe, the reason why OPEC oil-producing countries, led by Saudi Arabia, dares to continue to increase production is inseparable from the expectation of a rebound in demand from major Asian customers. OPEC+ believes that the Asian market can absorb more supply in the next few months, and Asian crude oil demand is expected to grow by 1.7 million barrels per day in 2022, exceeding 1.6 million barrels per day in 2021, and 3% higher than the pre-epidemic level.
The first quarter is a seasonal low in demand for crude oil, and there may be large fluctuations, but the overall market outlook is promising. The full impact of Omicron is still being evaluated. Although mutant strains are emerging one after another, the worst impact of the epidemic has passed. China implements an efficient and strict dynamic clearing policy to ensure the steady growth of consumption in Asia’s largest economy. India’s crude oil imports rose to their highest level in nearly 10 months as refineries stockpiled stocks for higher operating rates. The Japanese and Korean refining industries are cautiously optimistic that aviation fuel demand in the region will recover to about 70% of 2019 levels this year.
With the healthy development of the crude oil import-refinery processing-refined oil consumption chain, the crude oil market is in a price recovery mode with stable supply. In particular, Asian crude oil demand may have returned to an upward cycle after long-term uneven performance.
The center of gravity shifts downward and the outcome is hard to change
Judging from the results, OPEC+’s increase in production did notIt caused obvious negative effects, but brought some comfort to the market. On the one hand, the production increase plan is in line with the general market expectations, and on the other hand, it shows that OPEC+ has a certain degree of confidence in the prospects of crude oil. That is, there is an upper limit on supply and demand is still recovering, so it is difficult for oil prices to suddenly collapse from the high level.
Excluding short-term market sentiment and uncertain factors, it is the dynamic game of supply and demand that determines the long-term trend of crude oil. Looking at the annual time cycle, 2021-2022 will be the stage when the basic pattern of crude oil shifts from short supply to oversupply. At the beginning of 2022, we initially believe that although there is still considerable volatility in the market, the bull market in the previous two years has lacked stamina. The main trend of this round of crude oil may have reached the right side of the peaking process. It is expected that throughout the year The center of gravity of oil prices will shift slightly downward.
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