From April 2020 to early May 2022, oil prices rose from about $20/barrel to about $120/barrel. Over the past two years, oil prices have tripled. Since 2022, oil prices have averaged above $100 a barrel. Will the Oil Prices Continue to Rise up? Many people predict that it will be difficult for oil prices to fall below $100 a barrel in the half-part of this year. Therefore, the tightness of the energy supply in 2022 should be a significant concern.
By hearing this, you may be curious, what’re the key factors pushing up oil prices? Which industries have been greatly affected by rising oil prices? Will oil prices continue to rise up in the future?
I will tell you the conclusion first. In my opinion, there is no sufficient basis for a sharp drop in international oil prices. Next, let’s talk about it in detail.
Since 2022, the average price of oil has been around US$100/barrel, and the highest price has reached US$123/barrel at one point. That sounds scary, but it’s not the all-time high oil prices. If we extend the time to see, in 2008, the international crude oil price hit a record high, breaking through 140 US dollars/barrel. This historical record has not been easily broken out by early June 2022.
In the 15 years from 2008 to the present, international oil prices have fluctuated and oscillated non-stop. It’s been an impressive 15 years, and crude oil prices have never been so volatile. Why did such a huge change occur? It involves questions such as how significant oil is, how important oil will be in the future, and how long the new energy is to replace it.
So, how important is oil? It is the core energy source in the world. In the course of human development, oil has played a crucial key role, especially in the past 100 years. According to the statistics of the International Energy Agency, in the energy consumption structure of the world in 2020, oil accounted for the first, reaching 31%, followed by coal and natural gas, accounting for 27% and 25% separately. More than 80% of global energy consumption still relies on traditional fossil energy, namely oil, natural gas, and coal. Please remember this number, more than 80%. It means that no matter how important the new energy is, the global share does not exceed 20%.
Petroleum is not only the world’s first energy source but also an important chemical and industrial raw material. From the perspective of use, crude oil can be used for transportation, heating, and life after being refined into refined oil. Petrochemical industrial products can be used for construction, textile, light industry, fertilizer, etc. In addition, there are financial transactions derived from oil products. Oil involves agriculture, industry, service industry, manufacturing, traditional textile industry, heavy chemical industry, light industry… You see, so many important industries are closely related to oil.
So, how to analyze the trend of oil prices? Here, I will first give you a basic analysis framework: analysis from the three dimensions of supply and demand, market funds, and market expectations.
In terms of this, on the basic supply and demand, traditional energy need is returning, while the transition to new energy is not smooth. It is also difficult to increase crude oil production.
On the supply side, in general, global oil exports are concentrated. The Middle East, Central Asia, America, and Europe are the most important oil-exporting regions in the world. Among the global oil-producing countries, the top three in terms of output are the United States, Russia, and Saudi Arabia. But the combined output of OPEC allies far exceeds that of the United States. To a large extent, major oil-producing countries hold the right to speak on oil prices. Since the 1980s, OPEC has set production targets for its members, reducing production to insure prices. The oil extracted in the United States is mainly supplied domestically. Russian oil is mainly exported to Europe and China.
In terms of demand, the global economic powers generally have a large demand, while global oil demand is generally rising. The United States has a large demand and is self-sufficient. Chinese demand is rising, and imports are needed. Japan and India mainly rely on imports. Oil consumption in Saudi Arabia and Russia is much lower than production.
According to relevant statistics, the top 5 countries that import the most oil in the world are the United States, China, India, Japan, and South Korea. Ensuring oil imports is a security issue for major countries. Among them, the United States imports mainly as a strategic reserve. China imports mainly to fill the gap. In addition to the large energy consumption of each country, the lack of green energy substitution has further increased the oil demand.
To sum up a little, from the perspective of supply and demand, especially from the perspective of demand, in the short term, global oil demand has increased. As the global economy gradually returns to normal, the demand for oil in areas such as transportation, tourism, petrochemicals, raw materials, and agriculture will rise.
In the medium term, in the next 5-10 years, traditional fossil energy sources, namely oil, natural gas, and coal, have long-term rationality. Why do you say that? On the one hand, green and renewable energy such as solar energy, wind energy, and hydropower still face considerable challenges to expand their development and use. Whether it is the conversion efficiency of solar energy or the storage and transmission of new energy, there are still many technical challenges. At the same time, the price of new energy is not stable enough. Whether in Europe, the US, or China, their alternatives are insufficient.
Well, next, let’s look at the impact of market funds on oil prices. Energy investment has been a hotspot in the past two years. Among them, oil investment is the focus of energy investment. According to the statistics of the International Energy Agency in 2022, crude oil and natural gas accounted for the largest proportion of global energy investment in 2019-2021. Although the investment in renewable electricity is also growing rapidly, from the overall scale, the investment in crude oil and natural gas Growth is the most. So you see, capital doesn’t lie, and a lot of money is concentrated in traditional energy fields, not new energy.
There is also a rare anomaly in this one. Affected by the epidemic in 2020, oil demand has decreased, and oil futures have entered a slump mode. Negative oil prices have caused a huge impact.
Of course, some people have analyzed that there may be manipulation by speculators behind negative oil prices. Here I would like to remind you that crude oil futures are high-risk investments, and individual investors may lose their bottom if they are not careful.
Looking at oil prices from a financial perspective, we can also look at the relationship between the US dollar and oil prices. From historical data, the U.S. dollar is usually negatively correlated with oil prices. Oil prices may fall when the U.S. dollar appreciates, and oil prices tend to rise when the U.S. dollar depreciates. But this is just empirical data and is not always accurate. For example, in 2022, the dollar is appreciating, while oil prices continue to rise.
Therefore, what we see is that the relationship between supply and demand has a greater impact on oil prices than the impact of funds on oil prices. When we analyze oil prices, we cannot simply emphasize the historical experience of the US dollar and oil prices, but more importantly, the production and supply, demand, and consumption of oil from a global perspective. Supply and demand are the keys to truly understanding the rise and fall of oil prices.
After analyzing the impact of funds on oil prices, let’s take a look at market expectations, mainly the impact of risk factors on international oil prices. Among them, the new crown epidemic, geopolitical conflicts, and oil transportation are the three key risk factors.
After the new crown epidemic, many global oil tankers were suspended, and oil pipelines were unable to operate normally. To avoid oil supply cuts, many countries have imported oil frantically and increased their reserves. This has led to the fact that oil demand has not declined, but has risen rapidly in the context of the economic shut down after the new crown epidemic. Note that this is not real demand, this is an expected change, a risk aversion by oil importers. Because crude oil is an important strategic energy product, it is crucial to a country’s economic development and national security. The impact of geopolitical conflicts on oil prices is also very obvious. Whenever there is war in a major oil-producing area, the supply, export, and settlement of oil often go wrong.
Against the backdrop of the complex and volatile global political and economic situation, the demand for energy hedging in different countries and companies is on the rise. At the national level, strategic oil reserves are increasing; at the enterprise level, due to the large price fluctuations caused by supply and demand, many companies choose to increase oil reserves to control costs.
it is good. Earlier we analyzed three key factors affecting international oil prices, supply and demand, capital, and market expectations. Among them, the most important factor is the supply and demand relationship, and the rise in abnormal demand brought about by the hedging expectations related to the supply and demand relationship. In terms of financial factors, the weakness of the US dollar and the massive supply of the US dollar also provided necessary help and support for hyping up and pushing up oil futures prices.
Finally, let’s talk about whether oil prices will rise in the future? I think the combination of supply and demand and market expectations will keep oil prices high, at least this year. Unless production and supply increase significantly, or risk expectations are significantly reduced, it will be very difficult for oil prices to fall back quickly, especially this year.
