[Basics] What underlies the dispute over crude oil prices

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Crude oil, which is called the “mother of all commodities” and “the lifeblood of all developed countries,” is an important resource for the economic development of any country.

Despite attempts to reduce oil use and seek alternative green energy sources, crude oil remains a very important commodity.

Correlation between rising crude oil prices and inflationThere are probably people who have questions about

In this article, I will explain in detail the general framework of crude oil analysis.

Why is crude oil analysis important?

What factors influence crude oil prices?

The impact of commodities on oil supply

Geopolitics and unforeseen events could impact oil supplies

The impact of financial conditions on financial assets

Extreme weather affects the oil industry

For example, as of 2023, energyConsumer Price Index (CPI) of 7% It accounts for the weight of

It's not a big percentage, but price changes can affect monthly data changes.

Similarly, gasoline consumptionretail salesIt has a big impact on changes.

The rapid rise in crude oil prices is thought to suggest that both inflation and retail prices may be on an upward trend in the future.

Let's delve into how the political and financial characteristics of processed crude oil products affect crude oil prices.

Crude oil is a fossil fuel that can be refined into various products, such as gasoline, diesel, and liquefied petroleum gas.

In analyzing crude oil, it is important to first know the countries that produce crude oil.

Since crude oil is a non-renewable resource, countries with abundant reserves have the power to determine the price of crude oil. Therefore, in 1960, the country with the largest reserves of oil and natural gas in the worldOPEC (Organization of Petroleum Exporting Countries) ）I founded an organization known as.

OPEC's mission is to coordinate and unify member countries' oil policies to maintain market stability. This isOPEC controls the world's crude oil supply and has the power to determine crude oil pricesIt means. As of 2023, 13 countries are members of this organization,It accounts for approximately 40% of the world's oil production and 60% of the supply of the global oil market.

In order to ensure sustainable development, OPEC is constantIdle production capacityIt has been maintained. In reality, OPEC's annual production is only a fraction of these countries' reserves.In order to keep crude oil prices high and maintain stable income, there is a possibility that OPEC will actively cut production from time to time.

Saudi Arabia is currently the largest producer and exporter among OPEC countries. As of 2021, Saudi Arabia accounts for 34% of OPEC's crude oil production, which is more than double that of Iraq, which is the second-largest producer within the organization. This isSaudi Arabia is influencing OPEC's decision makingThat's why I often hear news reports.

Since oil is an essential commodity for economic growth,Oil production capacity and priceIt's always a hotly debated issue.

Non-OPEC countries are developing technology to break global crude oil supply patterns and compete for superiority in oil production. What are the top 5 oil producing countries in 2022The United States, Saudi Arabia, Russia, Canada, and China, all countries with the exception of Saudi Arabia are now non-OPEC members。

The United States is the largest in the worldshale oilBoasting reservesIt has increased production efficiency and reduced dependence on foreign oil imports.

The introduction of shale oil disrupted the pricing that had been controlled by OPEC until then and suppressed international oil prices over a long period of time, so an agreement was concluded between OPEC and 10 other oil-producing countriesOPEC+ (plus)There is a history that led to the establishment of

OPEC+ was established in 2016 and has expanded beyond OPEC member countries to include countries such as Russia, Azerbaijan, and Kazakhstan.

In short, both OPEC and OPEC+ aim to maintain stability in international oil markets. However, with the addition of new countries, OPEC+ has more oil supplies and proven reserves, and has become a major driving force affecting the global oil market in recent years.

Next, let's take a look at the demand side of crude oil. Crude oil is an important fuel source for global industries and automobiles, and the United States, which is the “automobile society,” is the largest producer and consumer of crude oil. Entering the 21st century, emerging economies, starting with China, have achieved rapid growth, and demand for crude oil has increased due to the need for infrastructure development and industrial expansion.

Measuring economic growthGDP(gross domestic product)Close relationship with global crude oil consumptionThere is. Major consumer countries such as the United States and China account for more than half of the world's total consumption, and their GDP is often highly correlated with crude oil consumption.

The 1973 oil crisis caused major disruptions in the world's oil supply. To address the unpredictability of oil supply and demand,OECD(Organization for Economic Cooperation and Development) in 1974IEA（The International Energy Agency) was established.

The IEA's mission is to maintain substantial oil reserves to deal with unexpected disruptions in oil supplies. There are 31 countries that are members of the IEA, and their inventory is mainly in the US, Europe, Japan, and South Korea.

*The OECD was established on December 14, 1960 by 18 European countries, the United States, and Canada. Currently, 38 countries responsible for discussing and developing economic and social policies are members of this organization. We regularly publish economic reports, statistical databases, analyses, and forecasts on global economic growth prospects.

EIA（(US Energy Information Administration) has very different responsibilities than the IEA, which is an international government agency. The EIA collects, analyzes, and publishes US energy information every week.The report provides information on weekly oil supplies, crude oil, and refined product inventory levels, reflecting current crude oil supply and demand conditions. Therefore,EIA data could have an impact on crude oil prices, commodity futures markets, and even the US dollar indexIt is thought that.

In addition to the EIA,APIs(American Petroleum Institute) also regularly publishes data on US crude oil inventories and oil refining operations.

Crude oil prices, like most commodities,The relationship between supply and demandIt will be decided byWhen supply is greater than demand, market prices fall. Conversely, when supply is limited and demand is high, crude oil prices are likely to soar.

Until now, the global oil market has always been a seller's market. OPEC+ member countries, which are well-known cartels, have a strong intention to keep crude oil prices as high as possible. Despite having the world's highest oil reserves, OPEC+ often ignores its own profits and adjusts global crude oil supply through production cuts and supply restrictions.

* A cartel (coalition), also known as an exclusive interest group, refers to an independent enterprise or organization that controls supply and manipulates prices.

OPEC+'s statement may have a temporary impact on crude oil prices.For example, in the latter half of 2022, crude oil prices fell from $120 to around $90 within 3 months due to concerns about the global economic downturn. OPEC+ to raise crude oil pricesDeclared production cuts in 2022/10Then, right after that, the standard Brent crude oil price skyrocketed above $93 per barrel.

Similarly,Crude oil inventories are a source of prediction about the relationship between supply and demand in the market.An increase in oil inventories means that the market supply is sufficient or demand is declining. In other words, it is thought that downward pressure is being applied to crude oil prices. Conversely, a decrease in inventory indicates an increase in demand, and it is conceivable that prices may rise rapidly.

For example, US commercial crude oil inventories areWTI crude oil priceThere is a strong inverse correlation with (West Texas Intermediate).

Crude oil is closely linked to geopolitics and international relationships between all commodities.In the event of a geopolitical dispute between major oil producing countries and consumers, there is a possibility that supply will decrease and crude oil prices will rise. Similarly, signs of improving relationships, particularly in oil-producing regions, are thought to be factors that increase crude oil prices because it is said that oil production and export will be difficult due to geopolitical tension.

Due to supply disruptions due to the oil embargo, two large-scaleworld oil crisishas occurred. During these periods, global oil market prices soared, which had a major impact on oil-dependent countries and significantly slowed down the economy.

Crude oil is a speculative asset that individual investors can trade by purchasing spot or futures contracts. The participants in the oil market areWTI Crude(West Texas Intermediate) andBrent CrudeThe two mainoil futures pricesI'm watching it carefully.

WTI crude oil futures are mainly priced in the US, while Brent crude oil futures are mainly priced in Europe. In Asia-Pacific regions such as China and India, prices are mainly based on Dubai crude oil.

WTI crude oil is highly liquid and transparent due to the development of the US financial market, and is an indicator of global commodity futures trading volume. Meanwhile, since Brent crude oil can be transported by sea, the range that can be transported around the world will expand. Currently, more than three-quarters of global crude oil transactions use Brent crude as a benchmark price.

From the perspective of correlation, it can be seen that crude oil is closely related to various financial assets.

You should also be aware of how they are related.

Other product prices andPositiveThere is a correlation betweenAs crude oil futures prices rise, other commodity prices tend to rise as well. In commodity investment, crude oil, which has the highest ratio in the commodity index asset management scale, is regarded as important.

Since crude oil is priced in US dollars,WTI crude oil prices are trending in the US dollar and bignegativeIt has a correlation betweenThe “oil dollar system” means that countries that buy and produce crude oil trade through US dollars. It is assumed that the United States will implement an accommodative monetary policy and that the value of crude oil will not change even if the US dollar falls. Then, in order to buy 1 barrel of oil, more US dollars will be required, and crude oil prices will rise. However, in recent years, due to various factors affecting crude oil prices,The correlation between crude oil and the US dollar is thought to be on a downward trend.

There is a weak correlation between crude oil prices and the stock market.Therefore, it is difficult for analysts to predict how oil prices will affect the stock market. However, since fuel is the main purchase cost for transportation companies, the transportation and oil sectors of the stock market are closely linked to spot crude oil prices. If crude oil prices soar, it can be assumed that investors may short sell stocks of transportation companies.

Strong with US government bondsnegativeThere is a correlation of. For example, if crude oil prices rise rapidly in 2023/9, there is a possibility that there will be a lasting impact on US inflation. This is why concerns that “the Fed will be forced to raise interest rates again” are at the center of market conversation. This concern makes it likely that US bond yields will rise. Since interest rates and bond prices are inversely related, the price of 10-year US Treasury bonds shows an unstable downward trend in most cases. (Higher yields, lower bond prices)

Crude oil and inflation expectations are bigPositiveThere is a correlation betweenTherefore, predicting crude oil trends is essential for analyzing the Fed's decisions. If crude oil prices rise, inflation expectations are likely to rise as well. If crude oil prices rise during the interest rate hike cycle, it is conceivable that the Fed can implement additional interest rate increases.

Since there are few changes in demand for crude oil and changes in supply are drastic, it is difficult to predict prices. However, investors can forecast crude oil prices by combining relevant indicators from four perspectives: commodities, politics, finance, and weather. Here are a few relatively important metrics for your reference.

Finally, crude oil is also affected by unexpected events such as extreme weather and natural disasters. Three examples are shown below.

Hurricanes and storms can cause serious damage to offshore drilling platforms, refineries, and pipelines, leading to higher prices.

Heatwaves and droughts can also affect the oil industry. For example, if the hot weather continues for a long time, the amount of hydroelectric power generation will decrease, and power outages are expected to occur. This has an impact on oil refining and transportation, and may lead to reduced supply and higher prices.

Winter storms can have various effects on the oil industry. This is because demand for kerosene and natural gas will increase as temperatures drop, and demand will increase.

While extreme weather events like this have various impacts on the oil industry, investors may be able to prepare for disruptions by monitoring weather patterns.

The above is the basic part of crude oil analysis.

Have you deepened your understanding of factors affecting crude oil prices and relationships with other financial products?

Think about it together with US monetary policy and geopolitical risks, and it would be nice if it were one of the supporting materials for judgment!