As crude oil inventories continue to increase, short sellers have been in the driver’s seat recently, with WTI crude oil and Brent crude oil futures both falling 8% last week.
Despite this, the International Energy Agency (IEA) remains optimistic about the demand outlook for the oil market. IEA Director Fatih Birol said on the 5th that China’s economy may rebound stronger than expected, thus boosting demand for oil and natural gas. Global oil demand is expected to rise by nearly 2 million barrels this year, with demand from China expected to be about half of that forecast.
Overall, oil market demand expectations have improved. Gui Chenxi, chief energy analyst at CITIC Futures, told reporters that China’s demand for oil products is beginning to recover.
After the peak of the epidemic at the end of last year, road traffic has rebounded significantly since January this year. Refinery gasoline and diesel shipments have improved significantly, wholesale prices have risen sharply, processing profits have improved, and operating rates have gradually picked up. It is expected that there is still room for recovery in gasoline demand in the later period, and diesel demand depends on economic progress. In addition, pessimistic expectations for U.S. oil product demand have eased slightly. Last year’s high oil prices and economic slowdown put greater pressure on demand for oil products in the United States and Europe. Since the beginning of this year, transportation travel in the United States and Europe has increased year-on-year. If the economic recession is expected to improve in the later period, it will boost overseas demand for oil products.
China becomes an important force supporting oil market demand
Last week, U.S. crude oil inventories increased higher than expected, and strong non-farm payroll data triggered market concerns about further interest rate hikes by the Federal Reserve. International oil prices encountered negative news, hitting a one-month low on February 3. The price of light crude oil futures for March delivery on the New York Mercantile Exchange fell 3.28% to close at $73.39 per barrel; the price of London Brent crude oil futures for April delivery fell 2.71% to close at $79.94 per barrel.
Gui Chenxi said that since January, international crude oil prices have risen and then fallen. The upward momentum mainly comes from the boost in financial trading sentiment. The economic performance of the United States and Europe is higher than expected, and leading indicators and prosperity indexes have shown signs of improvement. The Federal Reserve’s slowdown in raising interest rates boosted financial risk appetite, U.S. stocks rose, the dollar fell, and U.S. oil futures increased their positions significantly. The downward pressure comes from the current situation of accumulation of fundamentals. Although road transportation travel in China, the United States and Europe has shown good growth recently, it is not enough to completely offset the early oversupply pressure. The accumulation cycle since the middle of last year is still continuing.
But the good news is that as Western economies are on the brink of recession, China’s accelerated economic growth will become an important force in supporting oil market demand this year.
Sean Taylor, Asia Pacific investment director of asset management company DWS, told a reporter from the 21st Century Business Herald that China’s economy will “take off” in 2023. China’s economic growth in the fourth quarter of 2022 was 2.9%, exceeding market expectations. China’s economic growth is expected to rebound to 5% in 2023.
Coincidentally, Jeff Currie, head of commodity research at Goldman Sachs, also said that Western sanctions may lead to a decline in Russian oil exports, and coupled with the rebound in Chinese oil demand, oil prices will rise from the current level of around US$80 per barrel to more than US$100 per barrel.
In addition, Currie also emphasized that insufficient investment in oil production will also make it difficult for supply to meet demand, which is another important factor driving oil prices back to high levels. While oil trade remains balanced for now, production capacity could become an issue later this year when demand exceeds supply. As spare capacity is exhausted, we may face serious supply problems in 2024.
Long and short coexistence on the supply side
Overall, the current supply situation in the oil market is “mixed with joy and worry.”
Gui Chenxi believes that both bulls and bears coexist on the supply side of the oil market. OPEC’s fulfillment and extension of production cuts has been a positive for oil prices. The OPEC meeting on February 1 decided to extend the production reduction policy. In January, Saudi Arabia’s crude oil exports dropped significantly from the previous month by about 500,000 barrels per day. Remaining high in Russian crude oil supply is negative for oil prices. In January, Russian crude oil seaborne exports increased significantly by about 800,000 barrels per day month-on-month. Follow-up attention will be paid to the relative adjustment amplitude and comprehensive effect of the two.
The OPEC+ Joint Ministerial Monitoring Committee (JMMC) met last week and decided to maintain output policy unchanged. Until there is a clearer signal that the market needs more crude supplies, OPEC+ decided to maintain the status quo, hoping to have more time to assess China’s consumption data and the impact of EU sanctions on Russia.
On the other hand, Western price caps have not significantly reduced Russian oil exports for the time being, but they have pushed prices down. Birol said that the cap on Russian oil prices not only achieved the goal of stabilizing the oil market, but also reduced Russia’s oil revenue. Russia’s oil and gas export revenues fell by nearly 30% between January 2022 and January 2023. In January, Russia’s oil and gas revenues fell by about $8 billion compared with the same period last year.
Birol also noted that the petroleum products market will stabilize in the second half of the year. The G7 and the EU have implemented new price caps on Russian fuel exports, including diesel, which may cause some initial supply difficulties as trade flows adjust, but there are opportunities for countries such as India to increase diesel exports in the coming months. The petroleum products market will stabilize in the second half of 2023 as more refineries come online.
With the introduction of new Russian oil price limit measures, “transit countries” such as India have become increasingly important in the global oil market. Warren Patt, commodities analyst at INGAnderson pointed out that India is a net exporter of petroleum refined products, most of which will go to the West, helping to ease current tensions. Among the raw materials used in India, the proportion of Russian crude oil is growing.
For Western countries, India’s large purchase of Russian crude oil is actually in line with their original intention of imposing sanctions on Russian oil: while limiting Russia’s energy income, it also prevents Russian oil from completely withdrawing from the international market, thus causing an impact on oil supply.
Ben Cahill, a senior fellow at the Center for Strategic and International Studies, said: “U.S. Treasury officials have two main goals: keep the market well-supplied and reduce Russia’s oil revenues. They know that Indian refiners can buy Russian crude at a discount and market it to Export the product at a higher price and get a higher profit margin. They’re fine with that.”
In addition to Indian refiners, U.S. companies are actually the winners behind the scenes. Major U.S. energy companies stated in last year’s fourth-quarter earnings conference call that after the EU’s ban on Russian fuel took effect, profit margins this year are expected to remain high. ExxonMobil CEO Darren Woods said the company’s profits will remain strong this year thanks to tight fuel supplies, and this benefit may continue into 2024.
Regarding the future oil price prospects, Gui Chenxi believes that if the expected improvement in economic and demand can be realized, oil prices will still have room to rise, and it is expected to remain in the range of 70-100 US dollars per barrel this year. If WTI crude oil falls back to US$70/barrel in the short term, you can pay attention to whether there are long entry opportunities.
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