21st Century Business Herald reporter Wu Bin Shanghai report As the impact of the epidemic becomes smaller and smaller, and the economies of various countries continue to recover, the global "hunger and thirst" for energy is expected to continue.
This week, OPEC and the International Energy Agency (IEA) released monthly reports, showing optimism about the recovery of crude oil demand, and the continued failure of OPEC supply to meet the target may further push up oil prices in the future. Currently, Brent and WTI crude futures are hovering around $90 a barrel, near their highest levels since 2014.
Longzhong Information crude oil analyst Li Yan told the 21st Century Business Herald reporter that the global economy has been in a state of gradual recovery since the epidemic, and the panic caused by the Omicron mutation has dissipated, although the epidemic in many overseas countries has not ended, but most countries have no longer taken strict control measures, making the epidemic significantly lessen the obstacle to crude oil demand.
OPEC and IEA monthly reports release the signal that supply is in short supply
In this week's monthly report, both OPEC and IEA believe that crude oil demand will continue to be strong this year.
On February 10, OPEC released its monthly crude oil market report, maintaining the forecast for global crude oil demand growth in 2022 at 4.2 million barrels per day, while raising the 2022 OPEC crude oil demand forecast by 100,000 barrels per day.
Notably, OPEC highlighted in its monthly report that global oil demand could grow faster this year than the current forecast of 4.2 million bpd as economic activity rebounds and travel activity heats up. OPEC expects industrial activity to accelerate this year, boosting diesel demand, and the aviation industry in various countries is already showing signs of recovery.
"Based on the strong economic recovery observed continuously, and the fact that GDP has reached pre-pandemic levels, the upside potential for demand is widespread. With most economies expected to grow strongly, the outlook for world oil demand in the short term is certainly bright. OPEC said in its monthly report.
Similar to OPEC, the IEA believes crude oil demand will be strong this year. On February 11, the IEA released its monthly report, expecting global oil demand to increase by 3.2 million barrels per day this year to 100.6 million barrels per day, while the IEA also stressed that the OPEC+ supply shortage may continue to push up oil prices this year.
The IEA explained that since the beginning of 2021, OPEC+ has continued to fail to meet its output targets, resulting in a 300 million barrel reduction in oil market supply. If the gap between OPEC+ real output and target levels continues, the supply tension will further intensify, and the low spare capacity will also increase the possibility of oil prices rising and sharp fluctuations.
However, the tension in the oil market may be eased later this year. The IEA expects the oil market to turn into oversupply in the second quarter or second half of this year. If OPEC+ withdraws production cuts altogether, global oil output is expected to increase by 6.3 million bpd in 2022. If the U.S. lifts sanctions on Iran, supply is expected to increase by an additional 1.3 million bpd in 2022.
Can the upward momentum in oil prices continue?
After international oil prices broke through the $90 mark, the pressure on the Fed to raise interest rates was already looming.
The U.S. Department of Labor showed that the Consumer Price Index (CPI) rose 7.5 percent year-on-year in January, up from 7 percent in December, the biggest increase in four decades, according to data released by the U.S. Department of Labor on Feb. 10. CME "Fed Observation Tool" data show that after the release of CPI data, the probability of a sharp 50 basis point rate hike by the Fed in March has soared from 24% on the 9th to 89.9%, and the 10-year US Treasury yield also broke through the 2% mark on the 10th.
At the same time, data released by the American Automobile Association shows that the average national gasoline price in the United States reached $3.47 per gallon on the 9th local time, up 8 cents from the previous week and the highest value since October 2014.
Li Yan analyzed to the 21 reporter that with the us inflation explosion, the increasingly hawkish Fed will undoubtedly bear oil prices, and the specific impact will depend on the number and strength of the Fed's interest rate hikes, and also depend on whether the interest rate hike landing time can be achieved in March as expected. If the Fed's rate hike operations were more hawkish, oil prices would be more visibly depressed.
Warren Patterson, head of commodity research at ING, also said inflation data is likely to put more pressure on the Fed to take more aggressive action on rate hikes. This expectation is somewhat stressing crude oil and more commodities. Moreover, the Iran nuclear talks appear to be making progress, another factor dampening the rise in oil prices.
Edward Moya, senior market analyst at brokerage OANDA, believes that as the market's optimism about the Iranian nuclear negotiations is developing in the right direction, and the currency market begins to digest the Fed's sharp interest rate hikes, the upward momentum of crude oil prices has been blocked in the short term, but the oil market supply and demand situation is still very tight, and the era of weak oil prices is difficult to reproduce.
Overall, although the upward momentum of oil prices will be dragged down by factors such as hawkish Fed and Iranian nuclear negotiations, the situation of short supply and demand remains insoluble in the short term.
Tu Jianjun, senior adviser on China affairs at the Agora Energiewende Forum and former director of the China Cooperation Department of the International Energy Agency, told the 21st Century Business Herald reporter that the epidemic last year caused the global economy to suffer a heavy blow, and the demand for energy is also weakening. But then when global economic activity rebounded, energy demand rebounded faster than countries expected. In addition, due to geopolitical and other factors, there are also problems on the supply side.
It should be noted that OPEC+ is currently unable to increase production as planned to meet the growing demand. Although the OPEC+ meeting last week decided to maintain the oil production increase in March at 400,000 bpd, the actual increase in production in recent months has continued to fall short. For example, OPEC crude oil production increased by 64,000 bp/d to 27.98 million b/d in January, well below the increase in production promised in the OPEC+ agreement. The pattern of short supply has pushed oil prices up to a seven-year high of more than $90 a barrel and exacerbated inflationary pressures in major economies.
Li Yan analyzed to reporters that the market's view that OPEC + production may not be as expected is actually related to the will of major oil-producing countries. Oil-producing countries represented by Saudi Arabia hope that oil prices can remain at a relatively high level, and too rapid production increases will bring negative pressure. The question of how much to increase production in the future actually depends more on the will of the big oil producing countries, and there are also constraints on objective conditions, but they are mainly concentrated in a few countries such as Angola and Nigeria.
For the future, the continued downturn in investment in the oil and gas industry will undoubtedly pose a threat to crude oil production. Affected by the epidemic, the global oil and gas upstream capital expenditure in 2020 was only 329.7 billion US dollars, down 34% year-on-year. Crude oil prices picked up in 2021, but global oil and gas capital spending remained tight, up only slightly by 10% year-on-year to $362.3 billion, a sharp drop of 27% compared to 2019 and well below the ten-year average.
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