To The Moon

Since July, the international crude oil price has continued to rise, and broke through the mark of 90 USD/barrel in September. However, the rebound of international natural gas price as a clean energy is weak, and it seems that the surge of crude oil deviates from the current situation of weak global economic growth.

The surge in crude oil is the result of resonance between commodity attributes and financial attributes, especially the expectation of supply contraction brought about by the initiative of oil-producing countries to reduce production, and the expectation that the low potential replenishment demand of US oil strategic reserves may lead to short-term supply shortage cannot be falsified.

However, commodity prices and the fundamentals of supply and demand influence each other, and supply and demand will be dynamically adjusted due to the influence of prices. It is estimated that if the international crude oil exceeds USD 100/barrel, it will bring about a sharp rise in global energy costs, inhibit economic growth, and lead to a reduction in crude oil demand or its substitution by other energy sources.

On the other hand, high oil prices will stimulate oil-producing countries with less restrictions on traditional petrochemical energy and sufficient production capacity to expand production or end production reduction ahead of schedule, and the supply will be repaired.

Expectations of supply contraction

From the perspective of global crude oil supply, there has been an obvious contraction in recent years. Carbon neutrality and energy transformation have become the mainstream consensus in the world, and global oil giants continue to reduce capital expenditure and lack the willingness to increase production. Since 2013, the annual capital expenditure of international oil companies has been declining all the way, from 200 billion US dollars to about 100 billion US dollars. After 2022, capital expenditure began to increase, but only rose to about $110 billion.

On the one hand, under the global energy transformation, some countries have introduced policies to support clean energy and curb the development of traditional energy, resulting in a reduction in capital expenditure on oil exploration and exploitation.

Recently, the rise of international crude oil prices has led to an obvious increase in US crude oil production. However, due to the decrease of oil companies' investment in shale oil, the number of new wells and well completion has decreased, and the number of wells in stock is insufficient, which will restrict the continuous growth of US shale oil production. According to the data released by US Energy Information Administration (EIA), in the week of September 8, the US crude oil output reached 12.9 million barrels, the highest since March 2020. Baker Hughes data showed that the number of active drilling wells in the United States rose slightly to 525 on September 15th, compared with 512 before.

On the other hand, OPEC + 's continuous active production reduction leads to further contraction of global crude oil supply. According to OPCE monthly report, OPEC crude oil output decreased by 2.204 million barrels per day or 7.4% year-on-year to 27.449 million barrels per day in August. Among them, Saudi Arabia's crude oil output in August decreased by 1.963 million barrels per day compared with the same period of last year.

In terms of inventory, the global crude oil inventory is relatively obvious. In August, OECD crude oil inventories were about 4 billion barrels, almost the same as the same period of last year and lower than 4.4 billion barrels in the same period of 2019 before the epidemic.

In the process of curbing high oil prices and controlling inflation, the United States continuously released its strategic oil reserves from 2022 to 2023. As of the week of September 8, the strategic oil reserves of the United States dropped to 351 million barrels, which was halved from the high point in 2010 and lower than the 434 million barrels in the same period last year.

Consumption did not exceed expectations

Globally, global crude oil consumption did not exceed expectations. According to the relevant data of EIA, OPEC and other international institutions, the global crude oil consumption in August was about 101.3 million barrels, an increase of about 1.3% over the same period of last year, only a moderate increase.

However, due to the "soft landing" of the US economy, the Fed's rate hike is coming to an end, which makes the market optimistic about global crude oil expand and brings about a rise in investment demand, which is reflected in the obvious growth of NYMEX crude oil non-commercial net positions and crude oil ETF positions. According to the data released by CFTC, the non-commercial net long position of NYMEX WTI crude oil continued to rise from the low of 138,000 lots in the week of June 27 to 327,000 lots in the week of September 12, with an increase of 136%.

High oil prices will lead to rebalancing of supply and demand

Due to the energy transformation and the initiative of oil-producing countries to reduce production, coupled with the rising investment demand brought by the end of the Federal Reserve's rate hike, the crude oil market is in a mood of buying up but not buying down. However, high oil prices are unsustainable. On the one hand, high oil prices will stimulate crude oil output to resume growth; On the other hand, the global economy can hardly bear the impact of high oil prices, and the consumption of crude oil will decrease or the consumption substitution of other energy sources will increase.

On the supply side, as crude oil approaches USD 100/barrel, we expect OPEC + production reduction policy to be adjusted. Even if Saudi Arabia continues to lead the production reduction, Libya, Nigeria and Iraq are unwilling to continue to reduce production, but are increasing production instead. In addition, in August, with Saudi Arabia and other countries reducing production on a large scale, Iran and Venezuela increased production significantly, reaching 3 million barrels per day and 730,000 barrels per day respectively, increasing by 429,000 barrels per day and 49,000 barrels per day respectively compared with the same period last year.

In terms of consumption, on the one hand, the current global economic growth is weak, which makes it difficult to bear the impact of high oil prices, and high oil prices will increase the consumption substitution of new energy for petrochemical energy. The International Energy Agency (IEA) predicts that the global demand for oil, natural gas and coal is expected to peak before the end of 2030. On the other hand, the rise of energy prices poses a new threat to inflation in Europe and America, which is likely to cause the tight monetary policy in Europe and America to be maintained for a longer time or ashamed to restart rate hike, which is negative to economic activities and consumption.

To sum up, in the short term, due to the reduction of OPEC + production, the decrease of fossil fuel capital under the energy transformation leads to the contraction of supply, and the inventory of crude oil market is obviously de-stocked. The market is worried about the shortage of crude oil supply and the obvious increase of oil price. However, high oil prices will lead to rebalancing of supply and demand, and consumption will be restrained or replaced by new energy sources due to high oil prices, which may be difficult to sustain.

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