Review of the international oil market in the firs

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2007 Review of the international oil market in the first half of the year and outlook for the second half of the year

07 review of the international oil market in the first half of the year and outlook for the second half of the year

November 22, 2007

Structural supply tension continues to plague the international oil market, and the oil price has risen from $51/barrel at the beginning of the year to $77/barrel. Although OPEC has cut production twice in a row since November last year, crude oil supply is still sufficient. When crude oil inventories increased to the peak in the past nine years, oil prices rose to near the highest level in history under the influence of low oil inventories and supply risks caused by geopolitical tensions. The signs that high oil prices hinder the growth of world demand are not obvious, and the demand growth in the United States, China, India, the Middle East and Latin America is still quite strong

the refining capacity to meet the demand for high-quality oil products is tight, and the supply growth lags behind the demand, causing the crude oil price to rise with the oil products. The large-scale expansion of ethylene production capacity in Asia has increased the demand for raw naphtha and stimulated the record high prices of naphtha and gasoline. OPEC's production restriction has strained the supply of heavy crude oil, and the price of fuel oil has risen to an all-time high

the low operating rate of U.S. refineries continues, g) comparison of results: multiple experimental characteristic curves can be superimposed, reproduced and amplified with different colors. While the gasoline inventory is low, the distillate oil inventory, including heating oil, is also lower than the seasonal average. In the coming months, the tight supply of oil products may continue to be one of the key factors driving up crude oil prices. Under the condition that OPEC continues to limit production, the prospect of anti seasonal decline in crude oil inventories and the supply risk caused by possible accidents will also support oil prices

I. review of the first half of the year: tight oil products and supply concerns pushed up oil prices

1 The oil price rose from $50/barrel at the beginning of the year to $70/barrel

from the beginning of winter in the fourth quarter of 2006 to the first half of January this year, the warm weather in the United States and Europe led to a sharp decline in oil prices in early 2007. On January 18, the intraday WTI fell below $50/barrel. The continuous cold weather increased the demand for heating oil, the prospect of OPEC production reduction, the escalation of tensions between the United States and Iran, and the * * situation in Nigeria, making the oil price rise to nearly $60/barrel at the end of January and early February. Supported by the second round of OPEC production cuts and refinery maintenance that began in February, which led to a continuous decline in oil inventories in Europe and the United States and Iran, and the nuclear impasse between the United States and Iran, oil prices remained at a high level of around $60/barrel in late February and most of March. Iran's detention of 15 British sailors led to oil prices rising above $68/barrel at the end of March

in the second quarter, the oil price continued to rise under the influence of supply problems in Nigeria and the North Sea after taking a breather in April. The tension caused by the drill of nine U.S. warships entering the Persian Gulf through the Strait of Hormuz pushed the oil price up to $70.68/barrel on May 25. In the three months of January, the seasonal maintenance and frequent accidents of American refineries led to a continuous decline in gasoline inventories. The situation in Nigeria remained unstable after the presidential election. The chaos forced foreign companies to stop production of more than 200000 barrels a day, increasing the daily output of the country to about 900000 barrels

crude oil inventory is sufficient, but oil supply is tight. Tensions in oil producing countries and surrounding areas pushed up oil prices in June. A series of events, such as Hurricane "gunu" hitting Oman, Turkish army raiding Kurdish armed forces in Iraq, Baal microcomputer controlled universal experimental machine characteristics, the civil war in Stan and the national strike in Nigeria, have caused the market to worry about supply problems. Brent oil and WTI have been fluctuating in the high price range of more than $70/barrel at the end of June and the beginning of July

2. Oil inventory hoarding in the second quarter was the lowest in the same period of 20 years

the rising trend of oil prices in the first half of the year reflects the continued tight supply of oil products in the market. In terms of crude oil supply, it shows the tightening effect of OPEC's agreement to reduce production by 1.2 million barrels per day and 500000 barrels per day in November 2006 and February 2007, respectively, on the crude oil market, as well as the positive impact of the United States' announcement in late January that it would increase imports of 100000 barrels of crude oil a day from spring in order to double its strategic oil reserves on the market. After the United States implemented stricter oil quality specifications such as reducing sulfur content last year, its refining capacity to meet the new quality standards was tight. This has led to a decline in the operating rate of refineries, a decrease in oil production, and an increase in the inventory gap. In particular, the progress of gasoline plastic granulator technology before the peak season of vehicle fuel demand in May is closely related to the development of the entire national economy. In the second quarter, the average operating rate of U.S. refineries was only 89.3%, while the perennial average was about 95%. Since the end of March, U.S. oil inventory has increased by only 22million barrels, the smallest increase in inventory in the second quarter of the past 20 years

in addition to the tight oil market, the international political tension is also one of the key factors driving the rising oil price. Iran defied the resolution of the United Nations to stop its nuclear program and continued to promote its uranium enrichment program. The market is worried that Iran's nuclear impasse may lead to tougher United Nations sanctions. The intensification of chaos in Nigeria is also a threat to oil supply. In particular, the country's crude oil is rich in gasoline, which is a kind of crude oil favored by refineries during the peak gasoline demand season in the United States in summer

II. Outlook for the second half of the year: supply problems may continue to stabilize oil prices

1 Oil products are still tight and crude oil supply is tightening

the market trend reflected by the inventory performance of oil products and crude oil in Europe and the United States is completely two extremes. 2、 The seasonal hoarding of oil inventories in the third quarter was slow due to the low operating rate of U.S. refineries, so that when the market entered the peak driving season, gasoline inventories were 6% lower than the same period last year. Oil inventories in Europe and the United States increased by only 4million barrels in the second quarter, while the average increase over the same period in the past five years was 59million barrels. The change of gasoline inventory in Europe and the United States in is shown in Figure 1 (omitted)

although U.S. refineries tried to increase gasoline production and inventories began to increase in May, U.S. gasoline inventories remained below the historical low of the seasonal average at the end of June. The inventory consumption days of 21.5 days is the lowest record at the end of June in history. Two times in the past 20 years that were lower than this number of days occurred at the end of August, when the summer peak demand season ended. Exports to the United States reduced the gasoline inventory of 16 European Union countries by 13million barrels in the second quarter, and the inventory level also fell to an all-time low. Distillate oil storage is also low (see Figure 2 (omitted)). The tight refining capacity to meet the upgrading of gasoline and diesel specifications means that the oil supply continues to be tight

refinery problems led to a decline in unit operating rates and an increase in crude oil inventories. The operating rate of the refinery has been less than 90% in recent months, while the average level in the same period of the year is 95%. U.S. crude oil inventories are now at a nine-year peak. However, under the prospect of refinery increasing processing capacity after overhaul and OPEC continuing to limit production, the crude oil inventory that should have increased seasonally may decline rapidly. In the past two months, consumer countries have repeatedly called on OPEC to increase production, but OPEC has repeatedly stressed that it will not take action to increase production before the meeting in September, because high oil prices are not caused by a shortage of crude oil

2. Demand growth under high oil prices is still higher than expected

demand growth is faster than expected. After an increase of 800000 barrels per day last year, world oil demand is expected to increase by 1.5 million barrels per day this year, an increase of 2%. The growth part mainly occurred in the second half of the year. According to the prediction of the International Energy Agency (IEA), the world demand in the third quarter and the fourth quarter will increase by 2.1 million barrels per day and 2.5 million barrels per day respectively compared with a year ago, to 86.2 million barrels per day and 88 million barrels per day. The quarterly world oil demand forecast of the International Energy Agency is shown in Figure 3 (omitted)

most of the demand growth comes from developing countries. The vigorous growth of domestic demand increased China's crude oil import by 11% in the first half of the year to 81.55 million tons, or 3.28 million barrels per day, an increase of 330000 barrels per day. IEA predicts that the demand of non OECD countries will increase by 1.3 million barrels per day this year, of which 400000 barrels per day will come from China. In addition, the demand of the United States, the world's largest consumer, will increase by 300000 barrels per day

according to the US Energy Information Administration (EIA), the US oil demand increased by 1.6% in the first half of the year, reaching 20.77 million barrels per day, an increase of 330000 barrels per day. The record high retail price of gasoline did not stop the growth of demand. The demand for gasoline in the United States increased by 1.2% in June

3. The political situation and weather pose risks to supply

the geopolitical situation remains tense and continues to pose risks to oil supply. Nigeria's daily output of about 700000 barrels has been closed for nearly a year and a half, and after the ceasefire announced by the tribal organization expired, the recent attacks and kidnappings began to escalate. The trend of nationalization of Latin American oil industry is accelerating. ExxonMobil and ConocoPhillips' abandonment of the Venezuelan oil field project may mean that the domestic production will decline further

the nuclear dispute between Iran and the west is still in a stalemate. Iran's efforts to develop its nuclear program despite the Security Council resolution may lead to a new round of tougher international sanctions from the United Nations. The situation in Middle East countries, including Iraq, remains unstable, and terrorist activities continue to pose a threat to oil production and transportation. In addition to the political situation, the possible hurricane weather in the Atlantic storm season also brings risks to the market

4. Supply risks may push oil prices to new highs

world oil demand growth is still good in the face of high oil prices. The International Energy Agency and the U.S. Department of energy respectively predict that the world oil demand will increase by 2.0% and 1.7% in 2007, which is much higher than about 1% in 2006. In terms of supply, there are problems of tight refining capacity to meet the demand for high-quality oil products and OPEC's restriction on crude oil supply. This will continue to support the high oil price from the fundamentals

the average oil inventory increase of 190000 barrels/day in the second quarter of the United States was the lowest in 20 years, and the inventory fell to the low level in 2004. The main performance is that gasoline is 5% lower than a year ago. The increase in gasoline production in refineries has reduced the supply of heating oil. At the end of June, the distillate oil inventory was 6% less than that of the same period last year, of which heating oil was 43% less. This may mean that heating oil may replace gasoline in the late third quarter, becoming a key factor supporting the continued high oil prices

U.S. crude oil inventories are now at the highest level in nine years, which has a negative impact on oil prices. However, in the season of seasonal demand increase in the third and fourth quarters, the processing volume of global refineries will increase. Even if OPEC decides to increase production at its meeting on September 11, it may be difficult to prevent the rapid reduction of crude oil inventories in consumer regions because of the time problem of shipping to consumer regions. In this situation, the market is also facing supply risks caused by various complex factors beyond the fundamentals, including the geopolitical situation and the impact of Hurricane weather and other fluctuations in commodity and financial markets. Any unexpected event that affects the supply of crude oil and oil products may push the oil price to a new high. This may even make Brent oil in the second half of the year on average less than $64/barrel higher than that in the first half of the year, thus raising the annual average level from $65/barrel in 2006 to $66/barrel

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