The future of international oil market in the game twists turns

Concerns about weather in the Gulf of Mexico pushed oil prices higher on May 21st. WTI oil futures rose $1.53 to settle at $63.58 a barrel. Brent crude rose $1.33 a barrel to settle at $66.44. Since hitting $60 a barrel in mid-February, international oil prices have fluctuated between $60 $70 a barrel for more than three months. On May 17th the price of Brent crude rose to a nearly two-year high of $69.46 a barrel amid bullish expectations.

Some agencies see a shift in the relationship between oil supply demand. On May 12, the International Energy Agency released a market report that the current global crude oil surplus is basically cleared. Over the past year, OPEC + 's aggressive curbs on production, combined with a rebound in global oil demand, have led to a significant decline in last year's high global crude inventories. In March, commercial crude oil stocks in OECD countries fell to 2.95bn barrels, just 1.7m barrels above the five-year average. The IEA also believes that inventories are likely to continue to fall. That optimism was echoed by OPEC, which expects global demand to rise by 5.95 million barrels a day this year a year earlier, to 96.5 million barrels a day for the full year.

Oil prices have risen 4% since the start of May, largely thanks to a strong recovery in demand for crude. Many countries in Europe the US have reopened their borders lifted travel bans. In the United States, domestic flight traffic has recovered to 80 percent of pre-outbreak levels, data the Transportation Security Administration shows that the number of passengers passing through security at U.S. airports surged to 1.85 million on May 16, the highest since March 2020. This has driven a recovery in demand in the jet fuel market. The expansion of global vaccination coverage has raised hopes of a return to normalcy in the world economy further boosted market confidence. That optimism outweighs even the downside of a worsening outbreak in India.

While global oil demand is recovering steadily, the supply side continues to cut production, speeding up the balance of supply demand in the market. Over the past year, the oil market has suffered a major impact. Traditional oil producers represented by OPEC + increased production cuts. May to December 2020, they strictly implemented the production reduction plan of 7.7 million barrels per day, with the implementation rate of production reduction exceeding 100%. The 7.2 million b/d reduction will be maintained 2021 onwards, with subsequent adjustments of no more than 500,000 b/d per month. On April 27, the resolution of the OPEC/non-OPEC ministerial meeting pointed out that since the implementation of the production cut in May 2020, OPEC + has cut output by 2.6 billion barrels, making a positive contribution to stabilizing the international oil market.

In non-Opec countries, investment in oil gas exploration development is also shrinking, which affects the recovery in supply. In recent years, under the influence of low oil prices, global oil gas project investment has been at a low ebb. Global investment in oil gas projects was $800 billion in 2014, but dropped to $500 billion after 2015, dropped to $330 billion in 2020 due to the pandemic. Upstream investment has recovered slightly this year, but remains relatively low. Under the energy transition carbon neutral vision, many major international oil companies have increased their investments in renewable energy carbon reduction. Z-Advisors has even warned that the world's big oil companies' existing proven reserves will run out within the next 15 years.

In its May 12 report, the IEA made it clear that supply growth in the second half of the year is likely to outpace demand growth as further destocking continues. This has also raised concerns about tighter supply in the future. Reflecting this expectation, Brent has moved into backwardation on several trading days since May.

The game between supply demand in the global crude oil market is complex tortuous. While there are signs of a pick-up in demand, it is far a supply crunch. In the past few years, loose supply in the crude oil market has become the norm. Whether supply demand can reverse in a short time depends on the game of forces all sides, there are also many uncertainties.

As oil prices have risen, the supply side has begun to ramp up. By the end of April, OPEC + was already working on a plan to gradually reduce the scale of production cuts, agreeing to increase output by an average of 350,000 b/d in May, another 350,000 b/d in June about 440,000 b/d in July. Iran is expected to return to the oil market after sanctions are lifted, adding 1.5 million b/d to the market as negotiations between the U.S. Iran are progressing.

More noteworthy is the fact that U.S. shale oil is also actively coming back to production. In the week ended May 21, the domestic active rig count rose to 455, up 137 a year earlier, according to Baker Hughes. The U.S. Energy Information Administration noted that domestic oil production fell to 10 million b/d in May 2020 has returned to 11 million b/d this year as oil prices have recovered. The U.S. Energy Information Administration estimates that domestic oil production could rise to 12.2 million barrels per day by the end of 2022, if only WTI prices remain at $55 per barrel.

the current market demand growth momentum is likely to hit a ceiling in the future. The current epidemic is far over, it is still uncertain whether the world economy can sustain its support for oil demand growth. In the longer term, faster electrification of the transport sector, driven by national policies to decarbonise energy, will significantly affect the momentum of oil demand growth over the next decade. In a recent report, Z-Advisors Energy predicted that global oil consumption could peak in 2026, earlier than its previous estimate of 2030. However, Z-Z also noted that global demand will remain at 100 million barrels a day beyond the peak will remain there for a considerable period of time.

It can be seen that with the initial progress made in global epidemic prevention control this year, both demand supply are recovering, but the pace may be consistent. In a game, markets may be tight loose oil prices fluctuate, but overall, the fundamentals of the market are unlikely to change dramatically. For traditional oil gas enterprises, they should be blindly optimistic pessimistic. Only by conforming to the market situation, grasping the market demand accelerating their own business transformation, can they overcome the cycle of industry market fluctuation again again.

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Source: International Petroleum Network