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Oil-producing countries are determined to reduce production. Can relatively high oil prices be sustained?

In early October, OPEC+ production cuts pushed oil prices to soar. By mid-October, concerns about economic recession in Europe and the United States began to envelope the oil marke…

In early October, OPEC+ production cuts pushed oil prices to soar. By mid-October, concerns about economic recession in Europe and the United States began to envelope the oil market again.

On October 14, international oil prices plummeted by more than 3%. As of the close of the day, the price of light crude oil futures for November delivery on the New York Mercantile Exchange fell by 3.93% to close at US$85.61 per barrel, a cumulative decline of 7.58% in a week; The price of Brent crude oil futures for delivery in London fell 3.11% to close at $91.63 per barrel, a cumulative drop of 6.42% in the week.

On the other hand, although demand concerns are negative for international oil prices, as oil producing countries continue to defend their decision to cut production, international oil prices still have good fundamental support.

On October 15, the Secretary-General of the Organization of Arab Petroleum Exporting Countries (OAPEC) issued a statement stating that “OPEC+” cutting oil production was the right decision made at the right time, taking into account the uncertainty of the global economy.

On October 16, OPEC Secretary-General Haitham Gass once again emphasized that the oil market is in a stage of severe fluctuations, and the goal of OPEC and non-OPEC oil-producing countries is to maintain the stability of the oil market.

Recession fears rise as U.S. interest rates rise

As stubborn inflation continues to remain high, central banks in Europe and the United States and other countries are intensifying the tightening trend, and recession concerns are also rising sharply.

On October 13, data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose by 8.2% year-on-year in September, only 0.1 percentage points lower than in August, stronger than the 8.1% expected by economists, and remained at the lowest level for the seventh consecutive month. Above 8%. At the same time, the U.S. core CPI rose 6.6% year-on-year, the largest increase since 1982, higher than the average economist’s expectation of 6.5%.

After the release of the inflation data, the market now expects the Federal Reserve to raise interest rates by 75 basis points at both of its remaining two meetings during the year. Barclays predicts that the Fed will raise interest rates more aggressively, with the Fed expected to raise the federal funds rate by 75 basis points in December, compared with a 50 basis point increase previously expected. In addition, Barclays also predicts that the Federal Reserve will raise interest rates by 50 basis points at its February 2023 meeting, compared with the previous forecast of 25 basis points. Overall, Barclays expects the U.S. federal funds rate to rise to a range of 5%-5.25% in February next year, an increase of 50 basis points compared to the previous forecast of 4.50%-4.75%.

Zhao Wei, chief economist of China International Finance Securities, analyzed to a reporter from the 21st Century Business Herald that in the next two quarters or so, the core conflict will still be the expected revision of the Federal Reserve’s endpoint interest rate. After the September CPI data was released, the market fully priced in a 75 basis point interest rate hike in November, and expectations for a 75 basis point interest rate hike in December rose from less than 30% to around 70%. More importantly, the market’s expectations for the end-point interest rate level have risen sharply from 4.65% to around 5%, and the 10-year U.S. Treasury yield has exceeded 4%. There is still uncertainty about the level and sustainability of the Fed’s end-point interest rate in the future.

The market generally expects that the U.S. economy will officially enter recession in 2023, and there is little suspense about a European economic recession. A variety of commodities, from energy products to industrial metals, will be hit.

OANDA analyst Edward Moya said crude oil prices have had a tough week, with the demand outlook taking a hit as concerns mount about high inflation forcing the Federal Reserve to tighten monetary policy too much. In the previous week, oil prices surged due to OPEC+ production cuts, and in the latest week, they were dragged down by the worsening economic prospects in Europe and the United States.

Oil-producing countries are determined to cut production

Faced with signs of a decline in oil prices amid concerns about recession, oil-producing countries have chosen to resolutely cut production to defend high oil prices.

On October 5, the 45th OPEC Joint Ministerial Monitoring Committee (JMMC) and the 33rd OPEC+ Ministerial Meeting were held in Vienna, Austria. It was decided that starting from November 2022, OPEC+ will reduce its total oil production by an average of 200 per day. Thousands of barrels.

It should be noted that OPEC+’s decision to vigorously reduce production is only about a month before the U.S. midterm elections. For U.S. President Biden, who just visited the Middle East not long ago, OPEC+’s move may cause U.S. gasoline prices to rise again. The Democratic midterm elections Another bad encounter.

Therefore, before OPEC+ made its final production decision, Biden launched a comprehensive pressure campaign in an attempt to persuade OPEC+ at the last minute not to significantly cut oil production. But in the end, oil-producing countries are still determined to cut production. U.S. National Security Council spokesman John Kirby said Biden believes the United States should review its relationship with Saudi Arabia based on the OPEC+ decision and evaluate whether it is in line with U.S. national security interests.

In this regard, the Saudi Ministry of Foreign Affairs also issued a rare long response: The production reduction is not a unilateral decision by a certain country, but has the unanimous support of OPEC+ member states. It is “purely” based on economic considerations, and the goal of production reduction is to maintain the oil market. Supply and demand balance.

Saudi Arabia also confirmed that the U.S. government had asked Saudi Arabia and other major oil-producing countries to postpone by one month plans to significantly reduce crude oil production starting in November this year. However, Saudi Arabia refused. During the ongoing consultation process with the United States, the Saudi government stated that all economic analyzes show that if the OPEC+ production reduction decision is delayed for one month as recommended by the United States, it will have a negative impact on the economy.

Can relatively high oil prices be sustained?

In the short term, concerns about a global economic recession continue to rise, and the supply outlook remains uncertain. Under the game of long and short forces, it is not ruled out that oil prices will fall in the future. However, in the long run, supply problems are relativelyHigher oil prices are still expected to persist.

Bank of America believes that annual investment in oil and gas is now well below $500 billion after peaking at $750 billion in mid-2010. Those relatively inefficient and decentralized new energy sources have not yet matured, and Europe is more susceptible to the impact. Oil prices are expected to average $100 a barrel next year, meaning energy prices will be about 40% higher than they have been over the past decade.

Inflation concerns also hamper supply increases. A report this month by British consultancy Energy Aspects showed oil production in U.S. shale basins could peak in just two years as costs for drillers continue to rise. Inflation has prompted at least five producers to consider cutting the number of drilling rigs, while none plans to significantly increase production.

Fu Xiao, head of global commodity market strategy at Bank of China International, told the 21st Century Business Herald reporter that the global trend is green transformation. Against this background, oil and gas companies’ investment in upstream has not actually increased significantly due to the rise in oil prices. Global investment in fossil energy sources such as oil, natural gas, and coal in 2022 will generally remain lower than the level before the outbreak.

At the company level, on October 13, Mike Wirth, CEO of energy company Chevron, also warned that Western governments’ too-rapid shift in green energy policies will only lead to more volatility, more unpredictability and more uncertainty. Much chaos has exacerbated the global energy crisis. “The reality is that fossil fuels are the powerhouse of the world today and will continue to dominate the world five, 10, 20 years from now.”

Oil and gas companies are also less optimistic about the future. Fu Xiao said that oil and gas companies are less willing to invest in oil and gas resources as long-term assets, especially traditional onshore oil fields and offshore oil fields. Oil and gas prices may be affected by insufficient investment in the next 1-3 years. Oil and gas companies have to make a very long-term decision and are more cautious about long-term fossil energy investments under the green transition. Even though oil prices have risen a lot, U.S. shale oil production capacity has not increased significantly during the surge.

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