Oil prices are still rising

With the accelerated recovery of the service industry in the United States and the world, and the relatively controllable increase in the supply of OPEC+ and U.S. shale oil, the rising trend of oil prices is far from over.

As of February 19, Brent and WTI oil prices have increased by 23.4% and 24.7% respectively from the beginning of the year. The increase has far exceeded other major assets such as copper, gold and US stocks. The price of Brent oil rose above US$60/barrel. After exceeding the level before the outbreak in 2020, the market is increasingly divided on oil price research and judgment.

As the “mother of bulk commodities”, the price changes of crude oil are directly affected by the pattern of supply and demand. At the same time, after the two oil crises in the 1980s, the oil price determination mechanism has gradually stabilized. The trend direction of oil prices is mainly determined by demand. From historical data, as the “biggest” in crude oil demand comes from service industry activities such as transportation, and the United States is the world’s largest crude oil consumer, the trend of oil prices is closely related to the changes in the US service industry.

The high concentration on the supply side (OPEC, the United States, and Russia together account for nearly 60%), making the supply of crude oil vulnerable to changes in the production of a few oil-producing countries (or organizations) and fluctuates greatly. Looking back through the oil price cycle, at similar stages of changes on the demand side and different pressures on the supply side, the final rise and fall of oil prices often result in different levels of oil prices. Typically, from 2016 to 2019, due to the sharp increase in shale oil production in the United States and a boost in global crude oil supply, the cyclical highs of oil prices were significantly lower than in the past.

Since May 2020, the rebound in oil prices has been closely related to the recovery of the US service industry. Looking back at the performance of this round of oil prices, after the concentrated outbreak of the US epidemic in March 2020, as the US government implemented the “foot ban” and other prevention and control measures, which dragged down the service industry’s prosperity to historical lows, oil prices fell sharply. As of May 2020, with the successive unblocking of US states, the resumption of work and production, and the support of large-scale loose monetary and proactive fiscal policies, the service industry in the United States has begun to rebound, and transportation and other activities have gradually resumed. Affected by this, oil prices subsequently rebounded from a low level and entered the rising channel.

In addition to the improvement on the demand side, OPEC+ (a joint organization of OPEC and some non-OPEC countries such as Russia) has implemented the largest production cut in history since May 1, 2020, significantly reducing its average daily crude oil production by 9.7 million barrels. U.S. shale oil manufacturers have also “followed” and initiated production cuts. The total scale of production cuts once reached 3.7 million barrels per day. The sharp cuts in OPEC+ and U.S. shale oil production have accelerated the rise in oil prices.

With the large-scale promotion of vaccines and the continuous improvement of the global epidemic situation, the US$1.9 trillion fiscal stimulus bill of the Biden government is about to land, and the repair of crude oil-related demand will be further accelerated.

The experience since 2017 shows that after experiencing the significant negative impact brought about by the early low oil prices, OPEC+’s pursuit of high oil prices has become more intense, and it has been proactive in reducing production and restrained and cautious in increasing production. Take Saudi Arabia, the largest oil producer in OPEC+, as an example. From January 2017 to May 2018, during the process of rising oil prices from 53 to 80 US dollars per barrel, it has been insisting on reducing production by an average of 500,000 barrels per day. In 2019, to underpin oil prices, Saudi Arabia will further increase the average daily output reduction to 800,000 barrels. In January 2021, although oil prices have risen sharply from their lows, Saudi Arabia announced that it would voluntarily reduce production by an additional 1 million barrels per day in February and March.

After the current round of oil prices stopped falling and rebounded, the rate of increase in the number of oil rigs of US shale oil manufacturers was significantly slower than in previous cycles. Behind this is closely related to the sharp increase in the debt pressure of shale oil manufacturers due to the low oil prices in the early period and the sharp decline in expectations of future oil prices, which led to the latter’s drastic cuts in capital expenditures. The latest survey results of the Dallas Federal Reserve show that more than 80% of shale oil manufacturers in the United States have preset oil prices below $49 per barrel when they formulate their capital expenditure plans for 2021. At the same time, since the third quarter of 2020, the growth rate of equipment investment in the U.S. mining industry has continued to decline sharply, and in the fourth quarter it has dropped to a historical low of -18.2%. On the whole, the increase in US shale oil production in 2021 may be relatively limited.

From 2009 to 2012, driven by a substantial improvement in demand, the price of Brent oil rose from US$47/barrel to a maximum of US$122/barrel; from 2017 to 2018, with continuous improvement in demand, and OPEC+ controlling production and stabilizing the supply of crude oil, the price of Brent oil rose from US$53/barrel rose to a maximum of US$86/barrel. Looking ahead to this round of oil prices, with the accelerated recovery of the service industry in the United States and the world, and the relatively controllable increase in the supply of OPEC+ and U.S. shale oil, the rising trend of oil prices is far from over.