Oil prices surged again last Friday, with Brent crude exceeding $86 per barrel. Just half a month into 2022, the crude oil market has become very lively. Although Omicron is still raging around the world, hard-hit areas such as the United States and Europe clearly value the positive side of the epidemic becoming lighter. Regarding the Ukraine issue, Russia and NATO have been experiencing constant friction, and frequent geopolitical incidents have made the market quite nervous. On the supply side, the unstable situation in important exporting countries such as Libya and Kazakhstan poses challenges to supply stability. The implementation of OPEC+ production increase is weaker than planned, which also makes the market worry about the subsequent weakness of the supply side. Coupled with rising risk appetite, the bulls clearly outweighed the bears, and oil prices showed super-seasonal strength. Major institutions and market participants are once again optimistic about the outlook for crude oil. Data released by the U.S. Commodity Futures Trading Commission (CFTC) show that as of the week of January 11, speculators’ net long positions in crude oil increased by 62,138 lots to 525,784 lots. Long positions were the highest in nearly eight weeks.
As oil prices closed four consecutive positive weeks, Brent crude oil once again pierced the US$86/barrel mark, just a stone’s throw away from the previous high, with US$90/barrel and US$100/barrel beginning to come into view. If supply continues to be tight due to various factors and risk appetite is injected from the macro level, oil prices may have a chance to exceed last year’s high. Last year, stronger-than-expected oil prices allowed many oil-producing countries to achieve fiscal surpluses. Producing countries that have tasted the benefits naturally expect oil prices to remain high. However, while the market’s bullish enthusiasm is high, the consumer side has begun to respond last week. The U.S. Department of Energy said it sold 18 million barrels of Strategic Petroleum Reserve (SPR) to six companies. As oil prices rise, there are signs of heating up on the consumer side, which is reminiscent of the U.S. government’s violent response in October 2021 when oil prices were at a high level. In the context of the game brought about by the conflicting interests of supply and demand, mixed with the uncertainty of geopolitical factors, whether oil prices can break through last year’s highs and rush towards US$100/barrel has once again become the focus of market attention.
Expectations of excess supply and demand have been postponed, and EIA’s short-term energy outlook has changed significantly.
As time goes by, the panic about the Omicron mutant strain has basically subsided, while on the supply side, Libyan oil fields, port blockades and production shutdowns have led to a sharp decline in production. In addition, Russian crude oil production did not increase in December last year, which increased The market is concerned about whether OPEC+ can achieve a sufficient increase in production. Although we judge that OPEC+’s increase in production is a false proposition, as long as the core countries are willing, there is no problem at all in increasing production and meeting the standards. We witnessed the scene in March 2020 when Saudi Arabia and Russia were able to increase production by 1 million barrels per day one month after they broke up. Obviously, OPEC+ is not eager to increase production excessively to put pressure on oil prices during the current period of high oil prices.
Based on the tight supply and demand situation again and the apparent strength of the spot market, the U.S. Energy Information Administration (EIA) also made significant adjustments to supply and demand data in its January 2022 Short-term Energy Outlook. The EIA has raised its forecast for crude oil demand in 2022, predicting global crude oil demand growth to be 3.62 million barrels per day, compared with the previous estimate of 3.55 million barrels per day. The EIA has significantly raised its forecast for U.S. crude oil demand growth in 2022 to 840,000 barrels per day, from the previous 700,000 barrels per day. EIA predicts that average OPEC crude oil production will increase by 2.5 million barrels per day in 2022 to 28.8 million barrels per day. EIA lowered the growth of U.S. crude oil production by 50,000 barrels per day, believing that U.S. crude oil production will increase by 600,000 barrels per day in 2022 to 11.8 million barrels per day, compared with 11.85 million barrels per day in the previous outlook. However, the EIA expects U.S. crude oil production to increase by 610,000 barrels per day in 2023 to 12.41 million barrels per day, which will exceed the record of 12.3 million barrels per day set in 2019. The agency said U.S. oil production is expected to increase for nine consecutive quarters starting in the final three months of 2021. However, the supply and demand judgment in 2022 has obviously lowered the surplus expectations. EIA judged that the crude oil market will still be roughly balanced in the first quarter of 2022. This is in line with the OPEC meeting last week, which predicted a surplus of 1.4 million barrels per day in the first quarter, and the International Energy Agency (IEA). The monthly forecast surplus of 1.7 million barrels per day is a huge difference. It also shows that what happened during this period has drastically changed the crude oil market’s assessment of the supply and demand balance. The tight near-end supply in the crude oil market has also been fully reflected in the oil price. reflect. However, EIA predicts that the crude oil market will begin to be in surplus after the second quarter, with a surplus of approximately 500,000 barrels per day throughout the year.
On the consumer side, China’s General Administration of Customs released import and export data for December 2021 on Thursday, showing that China’s crude oil imports from January to December 2021 fell 5.4% year-on-year to 512.978 million tons, of which crude oil imports in December were 46.14 million tons. , before the Spring Festival holiday, stockings have rebounded significantly compared with last month.
In addition, the U.S. strategic crude oil release plan has begun to accelerate. The U.S. Department of Energy stated that it sold 18 million barrels of strategic petroleum reserves (SPR) to Valero Energy Company, Phillips 66, Motiva Enterprises, Marathon Petroleum Company, Gunvor Group (Gunvor), and Exxon Mobil Company, of which only Valero Energy Company (VALERO) of the United States purchased more than 8 million barrels of oil.
In fact, although the positive factors have had a greater impact recently, the crude oil market is not without negative effects. For example, there is news that Russia increased its production by 90,000 barrels per day in the first half of January 2022 compared with December 2021, and Libya…Oil volume is beginning to return. As oil prices continue to rise, the number of drilling rigs in the United States is also increasing. According to data from Baker Hughes Oil Services Company, the total number of oil rigs drilling in the United States increased by 11 to 492 in the week ended January 14, the most since April 2020. U.S. weekly inventory data shows that the accumulation of refined oil products is significantly higher than expected, which means that U.S. demand is still affected by the epidemic, and China’s non-state crude oil import quotas some time ago are far lower than the same period last year, which also makes people doubt the growth of China’s crude oil demand this year. However, the current market still revolves around factors such as tight supply in the crude oil market and escalating geopolitical tensions.
Frequent disturbances caused by geopolitical factors
The civil unrest in Kazakhstan has basically subsided, but such an incident in this country, which ranks 13th in the world in crude oil supply and has a production of 1.8 million barrels per day, still makes people feel that world stability is fragile. The Ukrainian issue is full of huge uncertainties. Russian Foreign Minister Lavrov said at a press conference that if the United States and NATO do not accept Russia’s proposal on security guarantees, Russia will evaluate the situation and take action based on its own interests. . According to reports, Lavrov spoke at a press conference about Russia’s previous security proposals to the United States and NATO. “If our guarantee proposal is rejected, we will assess the situation and act in accordance with our security interests. There is reason to believe that in the coming months NATO may use the situation in Ukraine as an excuse to start increasing troops around Russia.”
Poland’s foreign minister says Europe risks falling into war. At the same time, Russia said it has not given up diplomatic efforts, but military experts are preparing various options in case tensions in Ukraine cannot be eased. The White House said that the threat of Russia invading Ukraine remains high even though it has deployed about 100,000 troops, and the United States will release intelligence within 24 hours that Russia may try to make up excuses to justify the invasion. Russia says talks are continuing but have reached a dead end. Russia has tried to persuade the West to ban Ukraine from NATO and halt decades of expansion in Europe, but the United States has called the demands “unworkable.”
In addition to the obvious push by geopolitical factors to oil prices, the specific implementation phase of the Federal Reserve’s policies in 2022 has also attracted great attention from the market. On January 12, risk appetite in global financial markets increased significantly because Powell’s speech was “a little more dovish than recent meeting minutes and other Fed officials’ statements over the past few days.” In order to combat inflation, commodities are still the target of various fund assessments and allocations, and oil prices have also benefited from this sharp rise. Data released by the Intercontinental Exchange (ICE) showed that speculative net long positions in Brent crude oil futures increased by 43,019 to 249,927 lots last week, hitting a new high in nearly 11 weeks. Data released by the U.S. Commodity Futures Trading Commission (CFTC) shows that in the week ended January 11, the net long position of crude oil held by speculators increased by 62,138 lots to 525,784 lots. The net long position was the highest in the past eight weeks.
In the context of the global crude oil market inventory digestion of nearly 700 million barrels in 2021 and the market’s speculation about the energy crisis, oil prices have not exceeded US$90 per barrel. For the crude oil market, it is difficult to see a sharp decline in inventory again in 2022. From the spatial comparison of supply recovery potential and demand increase, there is a high probability that the crude oil market will still have a surplus situation, even if there are some unconventional factors on the supply side As a result, the increase is less than expected. The crude oil market in 2022 should also be in a tight balance stage. In this case, it is not easy to push the oil price to 100 US dollars per barrel, and it is also difficult for many countries such as the United States on the consumer side to accept this. situation. However, we must also note that the recent conflict around the Ukraine issue, the confrontation between Russia and the United States-led NATO, and the civil strife in Kazakhstan have injected a risk premium into oil prices, further increasing the tension on the supply side, and oil prices have therefore risen significantly. Geographical factors may become a huge variable in the crude oil market in 2022. If this aspect intensifies, oil prices are fully capable of hitting $100 per barrel. In addition, although from a general perspective, the Fed will tighten liquidity, the difference between the Fed’s actions and market expectations also has a huge impact on the market. Once it brings optimism to the market, it will give the market room for imagination.
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