The post-epidemic repair of the global crude oil market is not over, and the gradual recovery of supply is not as good as the stepped recovery of demand, so the fundamentals have always been tight. The frequent supply and demand disturbance events have broken the steady-state balance of the crude oil market many times, from the repair process of global aviation kerosene consumption was delayed twice by Delta and Omicron novel coronavirus, to the cold wave and hurricane weather in the United States, the risk of production reduction in OPEC+ agreement countries, and the supply shocks such as hacker attacks on the European port network. The uncertainty of both supply and demand makes the current oil market like a "standing coin". On the one hand, the price returns to fundamentals after the supply risk dissipates, and on the other hand, it rises further after the outbreak of geopolitical risk.

The current supply crisis in the oil market may mainly come from concerns about supply cuts in the peak demand season. Looking back at the long-cycle historical data of commodities, supply cuts are less likely to drive a structural bull market or supercycle. After all, the growth of global oil demand is still slowing, and China's domestic oil consumption growth has changed from strong to weak for half a year. In the long run, the high growth of global demand after the dissipation of the epidemic may be the premise that the surplus production capacity of oil supply restricts production growth and the key to the structural bull market.

Since the beginning of the year, supply risks have once again broken the steady state of the market. The price of Brent crude oil also exceeded our target average price of $85 per barrel based on the balance of supply and demand in the first quarter (regardless of new supply risk factors), and as some short-term disturbances dissipated, the unabated situation in Russia and Ukraine has become a core uncertainty in the direction of the global oil market. As far as the current market is concerned, the crude oil "price coin" stands above 90 US dollars per barrel, in which there is already a large supply risk premium, but if the production reduction that the market is worried about is realized, the current oil price does not fully reflect the possible supply shock. At a time when the demand and supply headwinds are uncertain, the reversal probability of the "standing coin" of oil may be unpredictable, but this paper still hopes to indicate the risk of short-term volatility by depicting both sides of the coin.

The current crude oil market is still in short supply, but the focus should not be on the United States alone.

The dislocation of the rhythm of crude oil supply and demand repair after the epidemic has led the market into a shortage situation, and the global crude oil inventory remains at a historical low in the same period, which to a certain extent magnifies the fluctuation of crude oil price to the supply and demand disturbance. Our research report "Oil: why supply and demand mismatch frequently" was released on October 17, 2021. 3Q21's higher-than-expected global crude oil depot is mainly due to a mismatch between supply and demand caused by weather in the United States, rather than a structural tightening of global fundamentals. Therefore, it can be seen that as the North American hurricane disturbance dissipates, the existence of 4Q21 in OECD crude oil depot does not appear super-seasonal inventory consumption, and even has a certain marginal repair. However, the cold weather since the beginning of the year has led to some super-seasonal consumption of US crude oil inventories, deviating from the inventory repair trend in other regions, which may also explain why the spot premium and speculative positions of Brent and WTI crude oil moved in reverse in early February, and the spread between the two quickly narrowed from $3 to $1 a barrel. We believe that the shortage of crude oil in North America began in the third quarter of last year, low inventories also have seasonal factors, but the destocking of crude oil in other regions has eased.

The current oil market may be unstable, like a "standing coin"

Overseas supply risks are everywhere, breaking the steady state of the crude oil market. In our research report "Oil: demand concern alleviated and supply risk re-emerged" released on January 16, 2022, we suggested that supply disturbances may upset the current steady-state equilibrium of the crude oil market and lead to the risk of oil price overrise. Today, the global crude oil supply risk premium has been realized, and even a certain higher than expected. We believe that there are four risks on the global crude oil supply side in the near future. On the one hand, the actual supply of crude oil has been hit to a certain extent, with the slowdown in OPEC+ production in January as the main drag, and the short-term disturbance caused by hacker attacks on the European port network. On the other hand, concerns about the risk of crude oil supply have also increased. In early February, the winter cold wave spread to Texas, the main energy producing region of the United States, raising fears of crude oil supply disruptions in the North American market, while the unended geopolitical dispute between Russia and Ukraine remains a potential risk for global oil supplies.

Supply concerns remain unresolved, and the current oil market is like a "standing coin". As the disturbance of production cuts in Libya is coming to an end, OPEC+ also decided at its production meeting in early February to maintain its plan to increase production by 400000 b / d in March, alleviating market concerns about its production shortfall to some extent. In addition, the cold weather in the United States has obviously eased, the National Oceanic and Atmospheric Administration (NOAA) has also lifted the storm warning for the coming week, while the European port network has generally been repaired within 2-3 weeks, and the partial cooling of supply risk has suspended the upward trend of crude oil prices in recent days, but the uncertainty of the situation in Russia and Ukraine has brought more risk premium to oil prices.

Under the benchmark case of global supply and demand convergence, the fundamental support of oil prices weakens.

We see that the root cause of the current shortage in the oil market is that demand recovers faster than supply, and looking forward, the recovery of global supply and demand is likely to converge in the benchmark scenario. On the one hand, after the supply risk disturbance, North American shale drilling activity is also recovering steadily as OPEC+ increases production step by step, and we believe that the global crude oil production repair process will continue. Under the benchmark scenario, global crude oil supplies will return to pre-epidemic levels by mid-2022. On the other hand, the current high growth rate of global oil demand mainly benefits from the compensation of damaged demand after the epidemic, rather than the strong support of economic growth, so after the end of the peak season of oil consumption and the repair of the gap between aviation oil consumption in Europe and the United States, OECD crude oil demand may return to the low growth rate before the epidemic, and with the continuous tightening of liquidity policy, the marginal slowdown of economic growth will also be a drag on crude oil terminal consumption. The growth of global oil consumption may be lack of support in the future. Generally speaking, the trend of the convergence of the gap between global crude oil supply and demand in 2022 will not change, and the market will still maintain a tight balance. We maintain the benchmark judgment of this year's crude oil prices in the annual outlook report "Commodities: more than damage, make up for deficiencies, and rebalance".

The situation in Russia and Ukraine is a key factor in the reversal of the current "price coin".

We believe that the current crude oil market is not steady and that short-term price highs may depend on the level of geo-conflict. While geopolitical risks are unpredictable, it is relatively certain that current oil prices may not be sustainable and short-term fluctuations may be amplified. At the end of the peak demand season, with the end of supply disturbances such as extreme weather and the risk of production reduction, the situation in Russia and Ukraine has become the key to determining the reversal of the "price coin". In our research report "A brief Review of the potential impact of the situation in Russia and Ukraine on the Commodity Market" released on January 29, 2022, we suggested that if the situation in Russia and Ukraine spread to the export of crude oil to Russia, supply expectations could not be realized. it will lead to a further shortage of the current crude oil market. If the geopolitical risk turns into an actual supply shock, assuming that Russian oil supply is reduced by more than 2 million barrels per day, on the one hand, the shortage of 500000 barrels per day in the global oil market in the first quarter of this year may be expanded by more than 2.5 million barrels per day. On the other hand, it is possible to reverse the equilibrium of the oil market throughout the year, shifting from balance to shortage again, and oil prices may face a supply premium of about 30 US dollars per barrel for the whole year. Of course, the other side of the coin is that if geopolitical risks cool in the future, the failure of market expectations will also drive oil prices back to fundamentals, and there may be a risk that the risk premium will fall in the short term.