After half a month of consolidation, oil prices finally broke through the previous high in February, breaking the volatile situation in January. Last month, as Saudi Arabia voluntarily cut production by 1 million barrels per day at the production reduction supervision meeting on January 5, the price of WTI crude oil surged nearly 5% on the day of the meeting, and soon stood at the $50 mark. This was the first time since last year. After the COVID-19 oil price plummeted, bulls recovered their losses of $50 for the first time. Just when people thought that the market would continue to rise to $55 or even $60, and some institutions had already called for a high price of $80, oil prices entered a half-month high. Months of shock have left many people puzzled. Now, as oil prices once again break through the previous high, the situation has become very clear. The key is where can oil prices climb to in the later period?
– 01-
Strong support on the supply side is expected to be maintained
Entering February, according to the results of the OPEC+ meeting on January 5, Saudi Arabia will need to In addition to the production reduction agreement discussed at the December meeting last year, an additional production reduction of 1 million barrels per day was achieved. Other OPEC countries and non-OPEC countries can increase production by 500,000 barrels per day in January, February and March in accordance with the provisions of the previous production reduction agreement. . Saudi Arabia has made considerable sacrifices and concessions in order to support the continued rise in oil prices. The main reason is that Saudi Arabia’s fiscal balance point is relatively high, above 80 US dollars, and the fiscal deficit continues to expand in the context of low oil prices. In the short term, it is necessary to avoid the continued deterioration of the fiscal situation, and in the long term, it allows enough time to realize its “2030 Vision”, which is why Saudi Arabia reduces production. main driving force. The current oil price is still a long way from Saudi Arabia’s fiscal balance point.
As oil prices continue to rise, Russia and some non-OPEC countries are beginning to worry about the resurgence of U.S. shale oil producers, and whether they will significantly increase production and squeeze out the OPEC+ market as oil prices rose after 2017. share. But this is more like a cover. Due to the low fiscal balance point of non-OPEC countries, Russia’s fiscal balance point is only 50 US dollars. Which option is more effective in increasing their own income and improving their own fiscal balance? Cutting production to protect prices or increasing oil production and exports. Favorably, as oil prices rise, the balance has begun to tip towards the latter option. As early as last December at the OPEC+ ministerial meeting, OPEC member states unanimously stated that they would postpone the second phase of the production reduction agreement until March 2021. However, Russia and Kazakhstan were very dissatisfied and resolutely increased production in accordance with the original production reduction agreement plan. In the end, After a compromise between the two parties, it was decided to increase production by 500,000 barrels per day every month after January. We can see that when oil-producing countries decide to increase or reduce production, they ultimately have to consider whether it is beneficial to their own pockets.
So the production reduction can continue under Saudi Arabia’s difficult maintenance, but as oil prices continue to rise, the conflicts between the two sides will become more acute. It is also a sword of Damocles for the subsequent crude oil market. According to a Reuters survey, OPEC production continued to increase in January. However, according to the new production reduction agreement, OPEC+ increased overall production by 500,000 barrels per day in January, and OPEC can increase 300,000 barrels per day. Therefore, the overall production reduction implementation rate is lower than that in December last year. improved.
Let’s talk about another issue, US shale oil Will production rise sharply with oil prices like from 2017 to 2019? I think the possibility is relatively small, mainly because although the number of shale oil rigs in the United States is increasing, due to the low absolute level, the increase in production from new crude oil wells is small, which is not enough to offset the attenuation of old wells. Production fell this week. 100,000 barrels per day may be just the beginning. Increasing production requires two conditions. One is a sufficiently high oil price, which improves cash flow in the short term. The other is high oil prices and high prices for a long time. The financial statements need to be improved in the medium and long term to attract capital.
Let’s take a closer look. In the shale oil production blocks, I can find that starting from 2019, except for the Permian, which has relatively good resources, production can maintain an increase. Even with an average price of US$55 for the whole year of 2019, other blocks have already entered a state of production reduction. The ultra-low oil prices caused by the epidemic have only accelerated this process. The short-term recovery of oil prices is not yet attractive enough for capital, so rising oil prices will be difficult to drive a significant increase in shale oil production in the short term.
– 02-
The optimistic expectations brought about by vaccination are gradually being realized
Pay attention to oil prices, the epidemic is of course the latest one and even in the future are important factors to pay attention to. The number of new confirmed cases is now showing signs of peaking. Vaccination is also progressing. The number of people vaccinated in major economies around the world continues to increase, with China and the United States leading the pace of vaccination in other countries. The uncertainty about the vaccine comes from two aspects. On the one hand, whether the existing vaccines are still effective against the constantly mutating virus, and on the other hand, the production capacity and transportation situation of the vaccine.
– 03-
Inventory remains in destocking status
Global crude oil floating position data The decline is still continuing, and U.S. crude oil is still in the process of depletion. In Europe, refined oil inventories have remained stable at high levels and have not increased significantly. Globally, destocking is still in progress. The mid- to long-term supply gap still exists, the fundamentals are that supply will continue to develop well, and the mid- to long-term upward trend remains unchanged. Under this situation of destocking, the traditional consumption off-season did not pose much hindrance to the rise of crude oil, and there was not even a correction. In February, as Saudi Arabia cut production, seasonal demand stabilized and rebounded, and the oil price rise became more stable.
Through the above analysis, we can find that the important factor supporting the continued upward trend of oil prices lies on the supply side. The recovery of demand is expected to require the vaccination and the daily increase in new crown cases. The numbers continue to confirm, but there is still uncertainty. So as long as OPEC+’s production cuts continue, bulls will continue to push up the market. Now let’s look back at the question raised at the beginning of our article: How high can oil prices rise? The author believes that this needs to be answered by the oil price itself. The rise in oil prices will intensify the contradiction between OPEC and OPEC+, and at the same time, there are contradictions between countries with different fiscal balance points within OPEC. The fiscal balance points of these countries are about 60-70 US dollars/ barrel, so $60 is probably the first target we can look forward to.
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