Although the global economic gloom has dragged down oil market demand to a certain extent, both consumption and production will maintain growth this year.
On January 10, Eastern Time, the U.S. Energy Information Administration (EIA) released the January “Short-term Energy Outlook” report, predicting that global consumption of liquid fuels such as gasoline, diesel and aviation fuel will exceed 100 million for the first time in 2023 since 2019. barrels per day, with average consumption expected to exceed 102 million barrels per day in 2024, setting a record high.
At the same time, the overall supply of the oil market is also at a high level, and different countries are experiencing “ice and fire”. The United States’ production is expected to hit a record high this year, while Russia’s production is “continuously falling.” EIA predicts that global liquid fuel production will increase by 1.1 million barrels/day in 2023, with an average of 101.1 million barrels/day; in 2024, it will increase by 1.7 million barrels/day, with an average of 102.8 million barrels/day.
Against the background of strong supply and demand, international oil prices may not plummet and return to the multi-year lows before the epidemic. Zhu Runmin, a senior economist in the oil industry, told reporters that from the perspective of world economic rebalancing, the negative factors in the oil market are currently relatively strong, the positive factors are relatively weak, and the driving force for rising international crude oil prices is relatively weak. However, unless the world economy experiences an extreme deterioration, , otherwise there is not much room for international crude oil prices to fall sharply, and the duration of operating at a lower level will not be too long.
Xi Jiarui, a senior analyst at Jinlianchuang Crude Oil, told reporters that although Western countries have adopted many sanctions against Russia, the current supply of the crude oil market is still relatively sufficient, which is mainly due to the relatively weak level of global crude oil demand. As the world’s major economies are in the midst of an interest rate hike cycle, expectations of a global economic recession and falling demand for crude oil have increased, and crude oil prices are in a weak state. However, as China optimizes its epidemic prevention and control policies, the market is gradually becoming more optimistic about the future demand for crude oil.
Judging from the performance of oil prices, despite the unexpected surge in U.S. crude oil inventories, international oil prices rose by more than 3% on the 11th, boosted by factors such as the improvement in global demand prospects and the impact of sanctions on Russian crude oil production. The New York Mercantile Exchange delivered in February The price of light crude oil futures rose 3.05% to close at US$77.41 per barrel; the price of London Brent crude oil futures for March delivery rose 3.21% to close at US$82.67 per barrel.
Data released by EIA on the 11th showed that U.S. commercial crude oil inventories were 439.6 million barrels last week, an increase of 19 million barrels from the previous month, far exceeding market expectations of a decrease of 2.2 million barrels, setting the largest weekly increase since February 2021, and also a record. the third largest increase since. The main reason behind the unexpected surge in U.S. crude oil inventories is that refineries have been slow to resume production after shutdowns due to winter storms, and short-term weather factors have little impact on oil prices.
U.S. crude oil production set for record high
In the latest report, EIA raised its forecast for U.S. crude oil production in 2023 to a record high of 12.41 million barrels per day, a slight increase from the 12.34 million barrels per day expected in the previous report. Crude oil production in 2024 is expected to increase compared with 2023. 3.22%, further increasing to 12.81 million barrels per day.
Zhu Runmin analyzed to reporters that changes in U.S. crude oil production mainly depend on the difference between the actual and expected price levels of WTI crude oil and the cost of crude oil. When the difference between the actual and expected prices of WTI crude oil is higher relative to the cost of crude oil, investment grows faster, exploration and development activities are relatively active, and production continues to grow. Although the current price of WTI crude oil has dropped significantly compared with mid-2022, it is still higher than the average production cost of U.S. crude oil. Upstream oil investment still has good returns, and upstream exploration and development is relatively attractive to investment. In addition, changes in domestic crude oil production in the United States generally lag behind changes in crude oil prices. The current production expectations for 2023 should be based on the crude oil prices a few months ago, and it does not rule out lowering production levels at some point in the future.
In the long term, there may still be room for growth in U.S. oil production. Zhu Runmin believes that expectations for rapid and substantial growth in short-term production should not be too high, but there is still room for growth in the long term. It is expected that U.S. crude oil production may still have room for an increase of 1 million barrels per day, and may remain at a relatively high level for a relatively long period of time ( 10 years or even more than 20 years).
Although global oil consumption increases, crude oil production in the United States and other regions will also continue to grow in the next two years. EIA expects global oil inventories to increase in the next two years, and crude oil prices are expected to fall in 2023 and 2024. Specifically, EIA predicts that the price of Brent crude oil will average US$83/barrel in 2023, an 18% decrease from the average price in 2022. As global oil inventories increase, EIA expects Brent crude oil prices to continue to fall to $78/barrel in 2024.
Russian production “continues to fall”
In stark contrast to U.S. oil production, which is about to hit a new high, Russia’s production is being hit by Western sanctions.
The EIA forecasts that Russia’s production of oil and other liquid fuels will fall from 10.9 million barrels per day in 2022 to 9.5 million barrels per day in 2023 and then to 9.4 million barrels per day in 2024. Echoing this, Russian Deputy Prime Minister Novak said last month that Russia may reduce oil production by 500,000 to 700,000 barrels per day in early 2023 to cope with the price ceiling.
Xi Jiarui said that according to Russia’s countermeasures plan, both crude oil production and exports will decline in January.As sanctions on petroleum products approach, Russia’s petroleum product production and exports will also be affected to a certain extent.
In fact, Western sanctions have already had a considerable impact on Russia. Xi Jiarui analyzed that due to sanctions on oil exports and increased expenditures caused by the Russia-Ukraine conflict, Russia’s fiscal revenue has dropped significantly. The budget deficit in 2022 will reach 3.3 trillion rubles, the highest level on record, accounting for about 2% of GDP. . Therefore, to a certain extent, the purpose of Western countries’ sanctions on Russia has been basically achieved. On the one hand, Russian oil is still circulating in the market, and on the other hand, its fiscal revenue has shrunk.
Affected by sanctions from Western countries, the price of Urals crude oil, Russia’s largest export volume flagship product, for Europe was US$52.48 per barrel on January 10, while the closing price of Brent crude oil that day was approximately US$80 per barrel. The price difference between the two was as high as Nearly $30. The price of Urals crude oil even fell to US$37.80 per barrel on the 6th, less than half the price of Brent crude oil.
A key reason why Urals crude oil prices are so low is that Russia has been forced to be at the mercy of Asian customers such as India after losing its largest export market in Europe. Since the outbreak of the Russia-Ukraine conflict, Russia has been exporting crude oil to Asian customers at discounted prices. Because tankers must travel thousands more miles to deliver cargo from western Russian ports to buyers in Asia, that means shipping costs have soared, forcing Russia to cut prices to compete with crude from the Middle East.
However, excessive oil price discounts will inevitably affect fiscal revenue. Russia will not allow this situation to exist for a long time. Putin has ordered Novak to draft a proposal to limit the impact of crude oil discount prices on the national budget. Novak said on the 11th that the momentum of expanding Russian crude oil price discounts should soon begin to reverse. “I hope this situation is temporary and discounts may soon become smaller, as they did in 2022, when discounts widened in March and April and then declined.”
Petroleum product price cap on the way
After setting a price ceiling of $60 per barrel for Russian seaborne oil, the G7 will next set a price ceiling mechanism for Russian refined petroleum products.
The EIA said it remains uncertain to what extent EU sanctions, G7 price caps and other sanctions will affect the production and export of Russian crude oil and petroleum products. “Most of Russia’s crude oil exports will continue to find buyers, but sanctions on petroleum products are likely to cause greater disruption to Russia, which will need to find alternative buyers for its petroleum products, as well as provide transportation and other services to these buyers,” This may be more challenging than dealing with crude oil sanctions.”
The Center for Research on Energy and Clean Air (CREA) in Helsinki, Finland, said that Russia has exported more than $3.3 billion worth of crude oil so far within the price cap, which has reduced Russian government revenue by an average of $172 million per day. Starting from February 5 this year, once the price ceiling is extended to refined products, Russia’s daily revenue loss may rise to US$280 million.
Will price caps have a greater impact on petroleum products than crude oil? Zhu Runmin thinks it’s basically the same. In 2021, the export volume of Russian petroleum products is only 53% of that of crude oil, but 71% of the target markets for petroleum product exports are countries and regions participating in the price limit alliance. On the whole, it is more difficult for Russian petroleum products to find more additional target markets. It is large, but the amount is relatively small, and the impact it receives should be basically the same as that of crude oil.
In the long term, what impact may the West’s price ceiling and other sanctions on Russia have in the future? In Zhu Runmin’s view, this mainly depends on Russia’s response measures. If Russia does not change its response strategy, it will inevitably have a significant impact on the sustainability of Russia’s oil industry investment. The current price level has had a great impact on the cash flow and profit levels of Russian domestic oil production companies. If it continues in the long term, it will affect the industry’s investment capacity, thereby affecting production and output. However, if Russia changes its response strategy and responds to the Western price ceiling, Russia can set a minimum price and will not sell products below the limit price. Although this will affect Russia’s market share, the impact on industry investment returns will be relatively weak.
</p
