In the long run, the price of oil and gas as a commodity is affected by supply and demand, and the escalation of geopolitical conflicts and OPEC+ production cuts are expected to lead to supply constraints, and the growth of demand is greater than the growth of supply, and the shortage of supply may support the rise in oil prices.
Why is demand outstripping supply? This brings us to the three major oil producers that can affect global oil prices: Saudi Arabia, Russia, and the United States.
As an OPEC member, Saudi Arabia has been shouting about production cuts since last year, and has been voluntarily cutting production by an additional 1 million b/d from July last year to the end of last year, with an average output of 9 million b/d in the second half of the year. So far, Saudi Arabia has produced about 8.5 million barrels of oil per day, down more than 20% from last year's peak of 11 million barrels, and the willingness to cut production is likely to extend into the end of this year or even the first half of next year. (Source: Bloomberg, Wind)
Russia is deeply affected by the Russia-Ukraine conflict, since the conflict, many European countries have begun to ban the import of Russian crude oil, so Russia's crude oil exports are limited, even if India and other countries undertake entrepot trade, the impact on Russian crude oil exports is limited, unable to fundamentally solve the problem.
Looking at the United States, after the last round of bankruptcy crisis, shale oil companies in the United States lack the ability and willingness to make large capital expenditures, and the impact of rising inflation is superimposed, and it is difficult for them to have marginal increments in actual capital expenditures.
Since the three major oil-producing countries will not grow for a period of time for various reasons, it is not surprising that the supply side of oil will be blocked.
The demand side of crude oil is relatively stable. There are several main categories of crude oil demand: travel, refining, and aviation crude oils. This corresponds to the daily travel consumption and durable goods consumption of the people, so the overall demand for crude oil is relatively stable.
At the same time, from the data of Bloomberg and the National Bureau of Statistics, it can be found that the apparent demand for crude oil in China and the United States in 2023 will hit a new high, and the reasons include the significant increase in travel demand after the opening of the epidemic, and self-driving has become a mainstream mode of travel; In the United States, the apparent demand for crude oil in 2023 is also higher than in 2022 due to economic resilience and strong household consumption.
Source: Bloomberg, Reuters, Bureau of Statistics
The steady growth in demand has led to direct inventory depletion, resulting in crude oil inventories that have been at extremely low levels. However, the price of crude oil did not continue to rise, which was due to the impact of the Fed's interest rate hikes.
The world's main crude oil is denominated in US dollars, and when the US dollar strengthens, it generally leads to a decline in crude oil prices. From the perspective of supply and demand, a stronger dollar will lead to an increase in the cost of other currencies to buy crude oil, and the pressure on demand will lead to a decline in prices. On the contrary, crude oil accounts for a large proportion of the CPI, and a stronger crude oil price may trigger a rise in inflation, and there is depreciation pressure on the US dollar.
Source: wind, as of 2024-04-09
In the short term, the risk of inflation in the United States is more from fluctuations in energy and food prices than from strong employment data. Looking forward, we need to pay attention to the trend of core inflation indicators, if the growth rate of core inflation in the United States continues to decline, there is still a high probability of starting an interest rate cut cycle this year, which will further drive up crude oil prices.
So how to lay out the overseas S&P oil and gas industry chain with one click and grasp the opportunity of rising oil prices? Welcome to the S&P Oil and Gas ETF, which closely tracks the S&P Oil and Gas Extraction Index!
As a true oil and gas index, the S&P Oil & Gas Extraction Index includes 52 leading companies involved in the exploration, production, refining and sale of oil and gas. From the perspective of industry distribution, the constituent stocks of the index mainly cover the two major areas of oil and gas exploration and production, refining and sales. ¹ At the same time, the index trend is strongly correlated with international oil prices, and the investment efficiency is higher. ²
¹ Source: S&P Dow Jones Indices Inc., Wind, as of April 2, 2024.
²Data source: Bloomberg, Wind, the statistical period is from May 21, 2010 to October 20, 2023.
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