OPEC's excessive reduction in oil prices is difficult to change

The monthly oil report released by the Organization of Petroleum Exporting Countries (OPEC) on the 14th said that the actual reduction in production by member states exceeded the requirements of the agreement, while raising the global oil demand forecast. Analysts generally believe that under the combined influence of market supply and demand changes and geopolitical risks, international oil prices still have sufficient upward momentum this year.

OPEC over-production

The latest monthly report released by OPEC on the 14th said that the OPEC oil-producing countries' production cuts are still higher than the agreement requirements. According to data collected by OPEC from third parties, OPEC's average daily output increased by only 12,000 barrels to 31.93 million barrels in April. This is about 800,000 barrels lower than what OPEC expects global demand for its daily oil this year.

Data directly reported by OPEC members show that the reduction in production is even larger. Saudi Arabia, OPEC’s largest oil exporter, said its oil production had fallen by 39,000 barrels per day to 9.868 million barrels per day in April, the lowest level since the January 2017 production cuts began. Venezuela said that production in April fell to an average of 1.505 million barrels per day, the lowest level in decades. Venezuela’s oil production has plummeted due to the economic crisis.

OPEC’s report also stated that the oil stocks of the Organisation for Economic Co-operation and Development (OECD) countries in March fell to a level of only 9 million barrels above the five-year average. In January 2017, this stock was once 340 million barrels higher than the five-year average. Reuters reports that the main goal of the production restriction agreement is to reduce this inventory to a five-year average.

In addition, OPEC also raised its estimate of global crude oil demand for 2018 in its report. OPEC expects the average daily demand for global crude oil in 2018 to be 98.85 million barrels, an increase of 1.65 million barrels per year, and strong global demand for crude oil.

OPEC believes that factors such as increased geopolitical tensions, tighter crude oil inventories and strong global demand supported the oil market's recovery in April.

In order to curb the downward trend of oil prices, non-OPEC oil producers such as OPEC and Russia have jointly reduced production in 2017. Oil producers such as OPEC and Russia decided at the end of November last year to extend the existing crude oil production reduction agreement to the end of 2018. According to the agreement, the major oil-producing countries have reduced production by about 1.8 million barrels of crude oil per day to alleviate the oversupply situation in the market. Over the past year and a half, oil inventories in major developed countries have fallen sharply to an average of 2.85 billion barrels.

Since the entry into force of OPEC, Russia and other non-OPEC oil producers, international oil prices have risen by 40%. After the announcement of the monthly oil market report by OPEC on the 14th, international oil prices continued to rise. As of the close of the 14th, the price of light crude oil for June delivery on the New York Mercantile Exchange rose 0.26 US dollars to close at 70.96 US dollars per barrel, an increase of 0.37%. London Brent crude oil futures for July delivery rose $1.11 to close at $78.23 a barrel, or 1.44%.

The rise in oil prices has prompted oil-producing countries outside OPEC to seek to increase supply, especially to attract US shale oil to increase production. OPEC expects non-OPEC oil producers to increase their supply this year by 1.72 million barrels, exceeding the increase in global demand. However, OPEC expects that these growth will also face resistance in the future. For example, the rapid growth of US shale oil production is increasingly limited by high logistics costs.

Geopolitical risk boosts oil prices

The shortage of geopolitical risks is a major factor that has continued to support a sharp rebound in oil prices in the near term.

US President Donald Trump announced on the 8th that he would "retire", withdraw from the Iranian nuclear comprehensive agreement and order the resumption of sanctions against Iran suspended by the agreement. Many viewpoints believe that this decision of the United States may bring about the risk of escalating regional conflicts, affecting the stability of the oil supply in the Middle East and triggering oil market shocks.

In July 2015, Iran reached a comprehensive agreement with the United States, Britain, France, China, Russia and Germany to commit to restrict uranium enrichment activities and nuclear projects limited to civilian purposes, in exchange for the United Nations, the United States and the European Union to lift their economic and financial sanctions. .

Since the international community stopped economic sanctions against Iran, Iran has returned to the ranks of the world's major oil producers. According to OPEC statistics, Iran has proven that crude oil recoverable reserves are about 157 billion barrels, with an average daily oil production of about 3.8 million barrels. Oil production ranks third in OPEC, accounting for about 4% of global oil supply. . Iran currently exports about 2.5 million barrels of oil a day, most of which is reached with Asian trading partners.

After the US “retreat”, the US government’s sanctions against the Iranian energy industry, including prohibiting US companies and US trading partners from purchasing Iranian oil, petrol and petrochemical products from state-owned enterprises such as the Iranian National Oil Company, will be “wide” in 180 days. After the deadline, it will be fully restored from November 4.

Kupu Qian, chairman of the Eurasian Group, a political risk advisory body in New York, predicts that if US sanctions are finally implemented, international oil prices will inevitably continue to climb. Heima Kroft, an analyst at Royal Bank of Canada Capital Markets, said that most investors expect the United States to impose sanctions on Iraq in various fields such as energy, finance, trade and insurance, thus affecting Iran's crude oil exports.

Some insiders believe that if the United States re-imposes sanctions on Iran, it may cause Iran's daily average crude oil exports to decrease by 200,000 barrels to 600,000 barrels, and in the worst case, it may be reduced by 1 million barrels.

Reuters analysts said that the oil market volatility triggered by the US recovery of sanctions can be compared to the market reaction of Western countries after imposing sanctions on Iranian oil in early 2012. In that year, Iran’s oil exports plummeted to a daily average of over 1 million barrels.

US Moody's analysts predict that the restoration of sanctions will reduce Iran's average daily oil production by about 400,000 barrels. However, the US sanctions may not be able to achieve the "effect" in 2012, because the United States and the European Union worked together this time. The EU explicitly opposes US policy.

It is reported that the leaders of the United Kingdom, France and Germany have recently traveled to the United States to persuade Trump not to withdraw from the Iranian nuclear agreement, but they all ended in failure. After Trump announced the "retreat" on the 8th, the three governments made it clear that they will continue to maintain the Iranian nuclear agreement, hoping that the United States will not obstruct.

OPEC’s current rotating chairman and the United Arab Emirates’ Minister of Energy and Industry, Sukhel Mazrui, issued a statement saying that OPEC is a non-political organization and will continue to work to achieve “oil market (supply and demand) rebalancing and investment in returning oil. Industry" goal.

It is reported that Saudi Arabia has intensified its confrontation with Iran in the Middle East in recent years and supported the United States to withdraw from the Iranian nuclear agreement. Saudi Arabia will try its best to maintain a stable global oil supply.

Oil price climbs with sufficient momentum

Analysts said that in the short term, geopolitical risks in the Middle East will continue to affect international oil prices. In the medium and long term, the balance of supply and demand in the international market will dominate the trend of international oil prices, while supply and demand indicates that international oil prices continue to rise.

Thomas Pew, a commodity analyst at the UK's macroeconomic consultancy, Kay International, said that geopolitical tensions in the Middle East have intensified recently. If Iran finally withdraws from the nuclear deal, the impact on international crude oil supply will be even more severe. This has caused international oil prices to “maintain upward momentum for at least the next few months”.

Yang Tao, a partner in the analysis of capital management companies, expects international oil prices to hover between $60 and $80 a barrel in the second half of this year. In the short term, uncertainties such as geopolitics and the direction of the US dollar in the Middle East will continue to support oil price hikes, but at the same time, the gradual demand for crude oil and the emergence of new energy sources will also inhibit oil prices.

The increasingly balanced market supply and demand is expected to continue to support the rise in international oil prices. Due to the expected impact of the balance between supply and demand, international oil prices have risen from $30 per barrel in early 2016. OPEC Secretary-General Balkindo said recently that since January this year, the global crude oil supply situation has changed significantly.

Some industry insiders estimate that the oil market will suddenly contract after years of oversupply. Eric Natal, a partner at the nine-point partner of Toronto oil companies in Canada, said that crude oil prices will rise to $80 a barrel next year, and stocks are expected to fall to their lowest level in 10 years at the end of this year.

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