Oil prices soar and production cuts may be in trouble

Since the new year, crude oil futures continue to be strong, constantly touch high. As of yesterday, the United States crude oil futures trading in 64.48 U.S. dollars/barrel line, Brent crude oil futures are close to 70 U.S. dollar mark. This round of crude oil long trend began in late June 2017, the domestic a-share oil and gas assets after 2 months followed the trend of oil bulls, such as Warburg oil and gas since the beginning of September has been harvested 25% of the gains.


However, yesterday’s oil futures bulls apparently converged on EIA inventory data as oil prices rose, and markets such as shale oil production and U.S. production growth were emerging.


The 70-dollar pass reproduces the “danger” argument.


Crude oil prices climbed in 2017, buoyed by the effective production cuts by the Organization of Petroleum Exporting Countries (OPEC) and continued declines in U.S. crude stocks.


The continued decline in U.S. crude stocks is an important support for oil prices in the 2017. According to the analysis, this is mainly due to the second half of the U.S. crude oil production growth slowed and oil demand increased, as well as the U.S. crude oil imports and exports increased. In particular, since August, the two hurricane attacks have led to a reduction in refinery processing and production in the United States, resulting in a widening price gap between WTI and Brent and a surge in U.S. crude exports.


At the resonance of the above factors, crude oil broke 50-dollar spell in September, and surged to the current 70-dollar pass. See the situation is good. A number of research institutions are reversing the idea of “short-selling” of crude oil.


Asia’s emerging and developing economies are expected to grow by 6.5% per cent, with growth expected to boost demand for oil, a combination of rapid declines in Venezuela’s expectations and a strong support for oil prices, according to a semi-annual report by the IMF, which is expected to raise global growth forecasts for the next two years by 0.2% to 3.9%. In addition, Saudi Arabia has recently openly expressed its stance of stabilizing the market.


The Research institute macro OPS predicts that crude oil will rise to $75/barrel by the end of 2018. This will push up the number of energy stocks and the energy sector will be the best performing industry by the end of 2018.


However, the figures released recently do not seem to support the continuation of this optimism. The latest American Petroleum Institute (API) data shows that as of January 19 the week, the U.S. crude oil inventory increased by 4.8 million barrels, gasoline inventory increased by 4.1 million barrels, distillate inventory reduced by 1.3 million barrels, Cushing’s region, the oil inventory reduced by 3.6 million barrels.
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Analysts said that if the EIA data and API performance is consistent, that is, if crude oil inventory also ended nine consecutive weeks of decline, will be a certain pressure on oil prices, the 70-dollar pass is at stake.


The US market will be the focus of oil markets


Concerns about an increase in crude inventories suggest that the accumulation of crude oil inventories is mainly due to seasonal declines in refinery operating rates. The key to determining oil prices in the future lies in the game between US crude oil and shale oil production and the OPEC limited-output agreement; Oil prices may start to fall as the US increases expectations.


In recent days, OPEC has warned that rising oil prices have stimulated the enthusiasm of shale oil producers, raising expectations for U.S. production. The International Energy Agency (IEA) also said that with the stimulus of high oil prices, U.S. crude oil production was the highest or up to 10 million barrels/day, replacing Saudi production status.


Analysts say this could hamper the oil market’s supply-and-demand balance, and the continued high oil price means it is not far from being adjusted.


Hughes statistics show that as of the end of 2017, the U.S. oil drilling has climbed from the 2016 lows of 316 to 751, and U.S. crude oil production has climbed from 2016 lows 15% to 9.71 million barrels/day, the highest level since the early 70. In 2018, U.S. crude oil production was expected to increase by 807,500 barrels/day, according to the average of the combined institutions.


Liu Jin, Zhang Yi and Li Yunxu of COFCO Futures Research Center noted that with the strengthening of oil prices in the second half of 2017, the number of active drilling rigs began to return to an upward trajectory, which will lead to accelerated future production of crude oil and more than 9.8 million barrels/day of crude oil production in the United States. According to the December 2017 EIA short-term Energy outlook, the 2017 U.S. crude oil average production of 9.24 million barrels/day, 2018 to 10.02 million barrels, will be more than 1970 years of U.S. history 9.6 million barrels/days of historical peak. In addition, the Trump government launched at the beginning of the U.S. National Energy Plan and the 2018 tax cut policy, will vigorously promote the shale oil industry rapid growth.


They believe that in the first half of 2018, the main OPEC countries will reduce the rate of implementation of production, and may even under the current high oil prices to increase domestic revenue, to avoid the subsequent fall in oil prices into a passive situation, the so-called prisoner’s dilemma.


According to historical experience, the “Prisoner’s Dilemma” under the OPEC cut cut agreement may be weakened, since the first time in 1982, since the introduction of limited production quotas, the initial implementation of a better, but with the marginal improvement in oil prices, the Member States will tend to overproduction.


However, Chen Tong that the growth of shale oil production in the United States still faces some challenges. First, the shale oil profit and loss balance price uplift. From 2014 to 2016, such factors as reducing the price of shale oil decreased significantly, but some factors were cyclical. In the past three years, North American E&Ps have lowered prices by signing fixed contracts with oil companies that desperately need cash flow, but the cost of drilling rigs, equipment and personnel is expected to increase after those contracts expire. Second, E&Ps the cost of capital increase. Unlike conventional oil and gas resource exploitation, 90% of shale wells will be released in the first two years of oil well production, so it is necessary to keep the output of shale oil growing continuously by adding capex to open drilling new wells, and many shale oil e&ps have relied on loans and issuing bonds for financing. However, as the US enters the interest-rate hike cycle, E&Ps is facing mounting credit crunch pressures, with some small and medium-sized companies having to shift to High-yield bond markets, with significantly higher capital costs.


How to deduce oil price in the future


Looking ahead, Chen Tong said the 2018 weak balance will be the main tone of the oil market supply and demand situation, oil prices will appear in a broad pattern of shocks. The effects of seasonal factors on oil prices under the weak equilibrium market will be highlighted, and the annual peak of oil prices is expected to appear in the two or three quarter demand season.

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COFCO Futures Research believes that the overall focus of oil prices in 2018 is expected to move up, Brent oil range at 50 USD/barrel-70 USD/barrel, WTI in 45 USD/barrel-65 USD/barrel. From a rhythmic standpoint, the core factor in the first half is to stock and shale oil production, the National energy plan and tax cuts will drive the rapid development of shale oil, U.S. crude oil production is expected to break through the first half of 2018 10 million barrels/day capacity, when the U.S. oil inventories stabilized rebound and production growth resonance, Prices were dominated by shocks; in the second half of the year, the Saudis could dominate OPEC’s efforts to boost oil prices by cutting output in a short period of time to lay the groundwork for a Saudi Aramco IPO and OPEC withdrawal from production. In addition, since the second half of 2017, the international geopolitical risk has spiked, the Saudi anti-corruption, the Trump government refused to recognize Iran’s compliance with the Iraq nuclear agreement, etc., may further push up oil prices in the short term, need to pay attention to the geopolitical increase in volatility.