Is crude oil expensive? Is there a yardstick to measure oil prices? |Spark Global Limited

[Source: Spark Global Limited]

The “demand determines direction, supply affects elasticity” framework does not apply to crude oil. From 2008 to the pre-epidemic peak, oil prices continued to fall, and crude oil endured a 12-year bear market. This led many to believe that oil demand was weak after the financial crisis, but the opposite was true. Crude oil demand grew at an average annual rate of 1.3% from 2001 to 2008 and 1.6% from 2010 to 2019.

The main reason for the oil bear market from 2008 to the pre-epidemic period was the transfer of pricing power and the improvement of marketization. Compared with conventional crude oil, shale oil in the United States has three characteristics: shorter production cycle; More market-oriented; Technological progress pushes the cost center down. In turn, the United States gradually gained pricing power for crude oil, as reflected in the 12-year pre-epidemic bear market.

Supply and demand determine the direction of oil prices; The oil market is changing. After Biden took office, the United States started the era of new energy development, and also carried out policy constraints on traditional energy. New energy will not replace traditional energy overnight. With marginal expansion of demand and marginal contraction of supply, crude oil is likely to return to a bull market in the next 5-10 years.

Inventory levels serve as a gauge of crude oil prices. Oversupply, rising crude inventories and falling oil prices; Supply is running low, crude inventories are falling and oil prices are rebounding. U.S. crude inventories are in line with their 2018 lows, and oil prices are virtually flat from their 2018 highs. Crude oil inventories have an absolute correlation of 88.1 percent with oil prices, which investors measure most of the time.

How to forecast the level of crude oil inventory and predict the reasonable range of oil prices? Three points need to be considered: 1) Crude oil prices will not have a clear direction when stocks fluctuate slightly, and we only need to look for the stage when stocks and prices have trend changes; 2) Without the impact of economic recession or recovery, the change of crude oil demand is relatively moderate and stable, and the trend change of inventory is often triggered by supply factors; 3) In terms of supply factors, we need to grasp the policy will and capital expenditure will behind OPEC and shale oil supply.

[Source: Spark Global Limited]
[Source: Spark Global Limited]
Is crude oil expensive? What are the expectations involved? WTI oil price is a bit expensive, cloth oil price is reasonable. Capital spending on shale oil under Biden’s new energy strategy has fallen off a cliff since Last July, and the market expects a significant supply gap once demand returns to pre-epidemic levels.

Is there a correction risk in crude oil prices? If OPEC does its best to increase production in the short term, oil prices are likely to adjust. OPEC may be reluctant to increase oil production for its own sake, but if oil prices continue to rise, the demand for intervention by China and the United States will also increase. The trend of oil prices in the coming months is indeed uncertain.

Next year, the international oil price will break $90 / BBL and break 100 in the next two to three years. Global crude oil demand is likely to surpass pre-EPIDEMIC demand next year. OPEC’s pre-pandemic production ceiling; Since July last year, shale production capacity has fallen off a cliff. There is a supply gap of about 2 million barrels per day (BPD) for next year, which will not be filled even if Iran fully recovers supplies, and stocks are expected to fall further next year.

[Source: Spark Global Limited]

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