How will the price of crude oil go in the future?

On January 5, WTI crude oil broke through the $50 / barrel mark, opening the way up; on January 8, international oil prices rose again. As of January 13, WTI crude oil approached 54 US dollars per barrel, while Brent crude surpassed 57 US dollars per barrel. From a fundamental point of view, supply tightening is expected to provide strong support for oil prices for some time, but demand remains uncertain. Crude oil prices are expected to continue to fluctuate strongly.

Crude oil supply tightening is expected to remain

As production growth in other major oil-producing countries except Saudi Arabia is limited for a foreseeable period of time, the overall margin of global crude oil supply has tightened on the support of Saudi Arabia's additional production cut of 1 million b / d from February to March.

As oil prices rebounded, some US shale oil companies gradually increased their spending, with the number of oil rigs gradually rising from 172 in mid-August 2020 to 275 in the week of January 8, 2021. In particular, there was only a slight month-on-month decline in the 16 weeks to January 8. However, the decline in output from new wells in most major shale producers did not lead to a rebound in US crude oil production, which remained at 11 million b / d in the four weeks from December 11, 2020 to January 1, 2021.

As for OPEC+, according to the data of OPEC monthly report, the overall implementation rate of OPEC production reduction was more than 100% from August to November 2020. For the December implementation rate, different agencies have slightly different data, of which Petro-Logistics believes that the implementation rate is 75%, and Platts survey shows that the implementation rate is 99%. Taking into account the increase in production in Libya, excess production in non-OPEC countries such as Russia, and the lack of implementation of compensatory production reductions in previous oil-producing countries, we believe that from December to December 2020, OPEC+ crude oil production is likely to exceed the requirements of the production reduction agreement, but by a small margin, and Saudi Arabia's additional 1 million b / d production reduction in February-March will fully cover the negative impact of previous OPEC+ production cuts.

We believe that global crude oil supply will remain tight in the short term. However, it should be noted that if Biden quickly removes sanctions on Iran and Venezuela after the transfer of power in the United States on January 20, judging from the recent statements of Iran's NIOC and Venezuela's PDVSA, it is likely to quickly restore crude oil production to the level before the sanctions within three months, when global supply will directly face an increase of more than 2.5 million barrels per day, and the OPEC+ production reduction agreement may expire ahead of schedule.

The prospects for US economic recovery are optimistic

Despite the continued improvement in global manufacturing and the year-on-year improvement in GDP in major economies, global demand for crude oil has not grown much. The current optimism in the market comes from good expectations about the prospects for the US economic recovery. On January 8, Biden publicly said that he had discussed the economic stimulus issue with House Speaker Pelosi and Senate Democratic Leader Schumer. After taking office, he will launch a multi-trillion-dollar economic stimulus bill, details of which will be disclosed on January 14. In 2020, the United States launched five rounds of economic stimulus bills, which were $8.3 billion on March 6, $192 billion on March 18, $2.2 trillion on March 25, $484 billion on April 23 and $2.2 trillion on December 29. Before the five rounds of economic stimulus bills were confirmed to be on the ground, the price of crude oil rose to a certain extent.

Since July 2020, the manufacturing PMI of China, the United States and the euro zone has remained above the boom line, and the rise in the manufacturing sector has led to a recovery in crude oil demand. In the second and third quarters of 2020, China's GDP growth rate became positive compared with the same period last year; in the second quarter of 2020, the US GDP growth rate dropped 31.4 percent from the previous quarter, while it rose 33.4 percent in the third quarter; and in the third quarter of 2020, the euro zone GDP growth rate fell 4.3 percent year-on-year, which is also much better than the 14.8 percent year-on-year decline in the second quarter. In addition, the gradual decline of global crude oil offshore floating warehouse and OECD commercial inventory is also a confirmation of the growth of crude oil demand driven by the improvement of the global economy.

However, judging from the specific performance of global crude oil inventories, the improvement in real demand for crude oil may not be as much as the market expected. In terms of OECD inventory, according to the OPEC monthly report, the total OECD inventory in October 2020 was 3.145 billion b / d, down 95 million b / d from the peak in June 2020, and the removal rate was less than 800000 b / d. In the United States, although commercial crude oil inventories have fallen by 55.263 million barrels from the all-time high set in June 2020 as of January 1, 2021, they are still at the highest level in the same period of the year. In addition, the total inventory level of gasoline + refined oil + aviation coal + fuel has also remained above 75% since 2013. In terms of offshore floating warehouses, as of January 1, 2021, the global offshore floating warehouse was 91.418 million barrels, down 57.84% from the highest level in June 2020, but in absolute terms, it is still above 88% since 2016. among them, the removal effect of offshore floating warehouses in Asia is much worse than that in other parts of the world, which is also a major reason why the inner market price continued to be weaker than Brent crude oil.

To sum up, when global supply remains tight in the short term, and demand is likely to continue to recover from the introduction of the US economic stimulus bill, crude oil prices are more likely to remain strong. However, it should be noted that with the US Democratic Party in control of both houses of the Senate and the House of Representatives, Biden's previous campaign promises may be easier to fulfill, and he needs to pay attention to the risk of production growth in Iran and Venezuela, as well as the risk of demand damage caused by the vigorous promotion of new energy in the United States.