Crude oil prices are expected to be high before and then low this year. Under neutral assumptions, WTI fluctuated at a high of US $90,110 per barrel in the first half of the year and fell back to US $80 per barrel in the second half of the year. CPI energy items are expected to linger in their current position until the end of the second quarter, but a sharp decline in CPI food items may not happen until next year. In the context of low oil inventory, the fragility of supply elasticity caused by geopolitical risks will aggravate the risk of volatility in the crude oil market.

Global crude oil inventories are at an all-time low, and supply risks magnify price fluctuations under the long-term tight balance between supply and demand. The current shortage of supply and demand in the oil market is mainly due to the periodic rebound of structural demand (heating, aviation kerosene) and supply reduction under geopolitical and capacity bottlenecks. But in the post-epidemic era, global oil demand growth will continue to return to fundamentals, following a slowdown in economic growth. On the supply side, US shale oil capital expenditure has rebounded and OPEC+ surplus capacity is sufficient, which means that there is no worry about supply in the medium term. Oil prices are expected to show a high-before-low trend for the whole year, based on which we measure its impact on US inflation.

Figure 1: crude oil stocks have fallen to a five-year low

There are many uncertainties in short-term supply, and the lack of long-term capital investment is the main cause of insufficient supply.

In the short term, geopolitical risks such as civil strife in Libya and the crisis in Ukraine could lead to supply disruptions. In the medium term, OPEC major countries such as Saudi Arabia, the United Arab Emirates, Kuwait and Iraq are willing to increase production, and the capital expenditure of US shale oil decides to increase supply. In the long run, insufficient upstream capital spending has led to limited capacity gains in small countries such as Angola, Nigeria and Congo.

OPEC+

Since the agreement was reached in July last year, OPEC+ has adhered to a monthly timetable for gradually increasing supply and gradually restoring oil production that was halted during the outbreak. However, some member countries have not been able to increase supply at the planned pace because of insufficient investment and instability. Production in OPEC + countries increased by just 250000 b / d in December, or 63 per cent of the organisation's target. OPEC's production growth continued to fall short of its quota in January. Among them, production in Iraq, which has both willingness and ability to increase production, fell unexpectedly in January; production in Nigeria, Libya and other countries with frequent supply problems in January were all flat or declined as expected.

Fig. 2 the actual increase in production of Pluto OPEC+ is not as expected.

In fact, with the exception of major countries such as Saudi Arabia, other small member states face capacity bottlenecks. In Russia, for example, the country's main crude oil company said in November that it was close to full capacity. Gazprom, Russia's largest crude oil company, also said it had no spare capacity and needed to continue to increase drilling speed if it was to continue to increase production.

The lack of long-term capital investment is the main reason for the insufficient supply of crude oil in some countries.Although oil prices have risen significantly in 2021, major oil companies have no significant plans to increase capital spending, and improving investor returns remains a priority.

The cash flow of upstream oil companies has improved significantly in 2021. According to Rystad Energy, although oil prices continue to rise, upstream investment activity is still very low. Globally listed exploration and production (EMPs) companies will generate record free cash flow in 2021, while FCF (cash flow from upstream activities) is expected to rise to $348 billion, up from a previous peak of $311 billion in 2008.

The total revenue of all listed upstream companies is expected to increase by nearly $500 billion in 2021, an increase of 55 per cent over 2020, but investment funds will grow by only about 2 per cent, leading to a significant increase in profits. Rystad expects upstream investment to rise to $307 billion this year, up 7 per cent from $287 billion in 2021. The capacity bottleneck caused by insufficient capital expenditure will be alleviated this year.

Figure 3: capital expenditure of the international oil and gas industry

Second, geopolitical tensions in the Middle East also disrupt global crude oil production.On January 26th, the crisis in Ukraine and political unrest in Kazakhstan briefly made Brent crude hit $90 a barrel for the first time in years. Earlier, Libya's two ports of Zawia and Mellitah and a pipeline suffered sudden supply disruptions, and Libyan production fell to the lowest level in more than a year (about 700000 barrels per day). In addition, the ongoing armed conflicts in Syria and Yemen have also had a certain impact on crude oil production.

Looking back, the situation in Russia and Ukraine will still disturb the risk premium of the crude oil market, but the repair of OPEC+ production will continue. According to EIA, global crude oil production in the fourth quarter of 2021 is 99.09 million barrels per day, which is still 3.89 million barrels per day compared with the same period in 2019, of which OPEC and non-OPEC countries account for about half of the gap. According to the current production plan, OPEC+ crude oil supply is expected to return to output levels before the April 2020 cut in July this year. Although the current OPEC surplus capacity is lower than the high point in early 2021, it is still higher than the ten-year average, and the surplus capacity of major countries such as Saudi Arabia and the United Arab Emirates is sufficient to meet the quota for increasing production.

The surplus production capacity of 4:OPEC is still higher than the average level of recent ten years.

Iranian supply is a potential variable. After Biden took office, US-Iran relations eased significantly, while Iran's foreign crude oil supply, which was restricted by sanctions, also began to recover. as of October 2021, Iran's crude oil production increased to about 2.5 million barrels per day, an increase of about 500000 barrels per day from the end of 2020, but it is still about 1.3 million barrels per day below the peak level. In the future, the further recovery of Iranian crude oil supply still depends on the progress of Iran's nuclear negotiations, and once an agreement is reached, it will speed up the recovery of Iranian supply.

America

The cold wave that swept through Texas at the beginning of the year affected some shale oil production, limited production of oil wells in cold conditions, and halted some transportation by trucks because of icy roads. Crude oil production dropped from 11.8 million barrels per day at the beginning of the year to 11.6 million barrels per day.

At present, the cold wave has eased significantly, and for the whole year, rising capital spending has pushed crude oil production back to 2019 levels in the second half of the year. Higher oil prices have led to a better-than-expected improvement in the economy of shale oil production, with investment in shale oil and gas expected to rise 18 per cent to $102 billion this year, compared with $86 billion last year, according to Rystad Energy. EIA expects US crude oil production to return to about 12 million b / d in 2022, 300000 b / d lower than the average in 2019. Figure 5: us crude oil production will return to about 12 million b / d in 2022, 300000 b / d lower than in 2019.

Source: EIATianfeng Securities Research Institute

At the end of this year, the global supply is expected to increase by 4.215 million barrels per day to 103.6 million barrels per day, of which the United States, Russia and OPEC respectively increased by 950000 barrels per day, 620000 barrels per day and 1.42 million barrels per day compared with the end of last year, while other countries increased a total of 1.23 million barrels per day.

Demand picks up and growth slows down

Since the beginning of this year, the market's concern about the widespread impact of Omicron on oil consumption has abated, and the repair of aviation oil consumption has led to a super-seasonal growth in crude oil demand. According to the latest data from EIA, the global demand for Q4 oil products in 21 years is 99.7 million barrels per day, which is only 1 million barrels per day compared with the same period in 2019. In 21 years, the growth rate of global oil demand for Q4 was 5.3% compared with the same period last year, and the pre-epidemic level was only 0.5%, with heating oil contributing to the main increase in demand.

Looking back, after the decline in seasonal heating demand in the cold winter, the restoration of aviation kerosene will dominate the further rebound in crude oil demand. But this year, global economic growth has slowed down, liquidity has tightened, and the growth rate of crude oil demand will decline periodically. EIA forecasts annual demand of 100.6 million b / d in 2022, an increase of 3 million b / d over 2021 (IEA forecasts 3.4 million b / d). Demand growth peaked at Q1 in 22, and then it will fall back to 1.8% of Q4 in 22.

Chart 7:EIA Forecast Quarterly crude Oil demand (millions of barrels per day)

Figure 8: classified forecast of global crude oil demand

When will the balance between supply and demand of crude oil appear?

According to the forecast of EIA, the balance between supply and demand of global crude oil will appear in the first half of this year, early in Q1 and late in Q2, depending on the month-on-month growth of Q2 crude oil demand.

The price of crude oil is high before and low after this year. Under the neutral assumption, we expect WTI oil prices to fluctuate at a high of $90-$110in the first half of the year and fall back to $80 in the second half as the balance of supply and demand reverses. However, in the context of low oil inventories, the fragility of supply elasticity caused by geopolitical risks will aggravate the risk of volatility in the crude oil market.

The fundamentals of crude oil supply and demand predicted by 9:EIA

If oil prices remain high this year, what will be the impact on inflation and inflation expectations?

Over the past 20 years, although oil prices have repeatedly exceeded $100 a barrel, Michigan inflation expectations have not exceeded the 5.2% set under crude oil prices of $134 a barrel in June 2008. One of the reasons is thatThe low proportion of American residents' energy consumption in total consumption leads to a decrease in the sensitivity of residents' inflation expectations to crude oil.. The energy consumption of American residents accounted for nearly 10% of the total consumption in the 1970s, which has declined since the 1980s and has fallen to about 4% after 2010.

Figure 10: WTI prices over the past 20 years, and Michigan inflation expectations

Figure 11: us residents' share of energy and food and beverages in the consumption structure has gradually declined by 1970 so far.

Low oil price situationCrude oil prices are expected to peak in the first quarter, reaching as high as $100 per barrel, before falling back linearly to $70 per barrel by the end of the year.

Neutral scenario: crude oil prices are expected to fluctuate at a high of 90 to 110 US dollars per barrel in the first half of the year and fall back to 80 US dollars per barrel in the second half as supply and demand reverse. High oil prices: crude oil prices are expected to peak in the second quarter, with a maximum of $120 per barrel, with linear growth during the period, falling month by month in the second half of the year and falling to $90 per barrel by the end of the year. Under the three oil price assumptions, the food and energy items of the US CPI fell at the end of the year. Under the assumption of high oil prices, the pressure on CPI in April was still high, and then fell back significantly to the level at the end of the first quarter of 2021. Under the neutral assumption, the CPI energy term hovered at the current position and fell back after the end of the second quarter. Under the assumption of low oil prices, the energy sector began to decline rapidly since the first quarter. But a sharp drop in CPI food items may not happen until next year.

Figure 12: energy and food trends of US CPI under three assumptions (%)