The Zhitong Finance App learned that CICC released a research report saying that the current crude oil price may be in a relatively reasonable position, maintaining the 1H24 Brent oil price judgment of 85 US dollars/barrel. Production adjustment adapts to a slowdown in demand. Under the relatively stable benchmark situation of the global economy, the bank expects the global oil market to face a supply gap of around 640,000 b/d in 2024. Although seasonal demand pressure may bring about a phased narrowing of the gap and price correction, the bank believes that the risk of rising oil prices during the year may still outweigh the downside risk, and it is expected that the 2H24 Brent oil price center may move upward to $90-95 per barrel.

CICC's views are as follows:

Expectation gap 1: Does OPEC+'s shift to increased production necessarily mean oversupply?

OPEC+ entered a new production reduction cycle in May 2023. Saudi Arabia led the tightening of production through additional production cuts of 1 million b/d. In 3Q23, the oversupply of global oil was cleared, supporting the rise in oil prices. However, as the 4Q23 OECD oil demand fell short of expectations, compounded by the continued increase in US crude oil production, fundamentals once again fell into excess. Looking at the whole year, global oil supply increased by about 1.83 million b/d in 2023, mainly the US and South America contributed 1.02 million b/d and 550,000 b/d of crude oil production increases respectively, completely offsetting the 460,000 b/d decline in OPEC crude oil production over the same period last year. In November 2023, OPEC+ extended the additional production reduction plan to 1Q24. With the exception of Saudi Arabia, the rest of the member countries added a total production reduction share of 700,000 b/day to continue to clear out excess supply. At present, OPEC+ is still actively implementing the production reduction plan. Total crude oil production in January-February 2024 was reduced by 30-400,000 b/d compared to 2H23. Recently, Iraq also indicated that it will actively cut exports from March to make up for excess production in January-February. On March 3, OPEC+ extended the 1Q24 additional production reduction plan to 2Q24 to maintain market stability. In addition, Russia added a total supply contraction quota of 471,000 b/d. The bank estimates that its crude oil production may decrease by about 400,000 b/d in 2Q24.

Unlike 2023, after experiencing OPEC+ active production cuts and non-OPEC production increases to a historical peak, the bank believes that by 2024, the remaining global crude oil production capacity may have basically been concentrated in OPEC+ countries, the supply order will be uniform, or it is expected to strengthen the effect of OPEC+ actively regulating production, which can also be seen as a lagging effect of OPEC+ production cuts. As can be seen, signs that US crude oil production is peaking as scheduled. As the number of rigs remains low, EIA weekly data shows that since March, US crude oil production has dropped from 13.3 million b/d to around 13.1 million b/d. The increase or probability of output from offshore oil fields in South America is relatively stable. Therefore, the bank believes that OPEC+ may actively restrict production in 1H24 and may be expected to maintain the shortage pattern.

Furthermore, there is still uncertainty about whether OPEC+ will further extend the additional production reduction plan in 2H24, but the bank believes that even if OPEC+ gradually relaxes production restrictions, the oil market may not necessarily face greater excess pressure.

The bank proposed not ruling out the possibility that OPEC+ supply growth will gradually return in 2024, but similar to the situation from 2H20 to 2021, since the global oil market shortage pattern has already been formed, in a situation where the demand path is still improving, supply regulation may gradually shift from reduction restrictions to controlled increases. Under the benchmark situation, the bank expects crude oil production, which has been further reduced by OPEC+, to gradually return in 2H24, and global oil supply may increase or fall to around 600,000 b/d year-on-year in 2024.

Expected difference 2: Stock demand growth weakens, macro-driven price decline?

As the main stock of global oil demand, European and American countries may face downward pressure on growth under high interest rates in 2024. Under market expectations that the Federal Reserve is about to begin a cycle of interest rate cuts, historical experience also shows that the oil demand side may face certain macroeconomic headwinds. Since the beginning of the year, the OECD oil demand performance has been repeated. In January-February, the OECD oil demand changed by 2.3% and -0.1%, respectively. In the month-on-month change in the growth rate in February, the US and OECD Europe dragged down 1.1 and 1.4 percentage points, respectively. Preliminary IEA data shows that OECD commercial crude oil inventories may have increased by about 3% month-on-month in February, mainly due to inventory accumulation due to US refinery maintenance.

Looking ahead, the bank maintains the judgment in its annual outlook that it may be difficult for OECD countries to contribute to the increase in oil demand in 2024, but from the perspective of demand expectations and balance, the bank believes there may be no need to worry too much. Some of the pessimistic market expectations for this year's oil market may be biased from a macro perspective. On the one hand, non-OECD countries are still expected to support demand growth. The bank expects global oil demand to increase by about 1.2 million b/d this year, and China and India are expected to contribute 500,000 b/d and 300,000 b/d respectively. From January to February 2024, China recorded an apparent consumption of refined oil products of 14.34 million b/d, an increase of about 900,000 b/d over the same period in the context of a low base. Looking ahead, at a time when improving energy efficiency and endogenous growth are equally important, the bank believes that in 2024, China's oil demand growth may focus on the “final puzzle” of international routes, implementation of policy support such as infrastructure projects, expansion of chemical production capacity, and the three short-term main lines of raw material investment demand. In January-February, India's oil demand recorded 5.31 million b/d, an increase of about 250,000 b/d over the previous year. India's PMI index continued to be strong in January-February. The bank believes that India is expected to become one of the few economies where oil demand is growing faster this year. On the other hand, although demand for OECD stocks has yet to stabilize, the bank believes that it may not have caused continuous pressure to accumulate stocks. As can be seen, with the gradual recovery of US refinery operations since March, commercial crude oil inventories have been eliminated. The year-on-year growth rate of oil demand, continued consumption of refined oil inventories, and a rebound in refining gross profit can all confirm marginal improvements in demand performance. Looking ahead, the bank expects that the OECD commercial crude oil inventory may be eliminated in March and will remain at a historically low level during the year.

Expected difference 3: Risk incidents are frequent, and the supply premium has been fully taken into account?

Geo-risk incidents have been frequent in recent years. From European and American sanctions against Russia after the Russian-Ukrainian conflict, to Russia's “countersanctions” measures against oil exports, to the Red Sea incident disrupting shipping trade, supply risks in the oil market continue to exist. However, as far as the current level of oil prices is concerned, the bank believes that the inclusion of risk premiums may be limited. On the one hand, the geopolitical incident has yet to cause a large-scale physical impact. Bloomberg data shows that after the Russian-Ukrainian conflict, the trade volume of Russian crude oil and refined oil products through the Suez Canal increased markedly. Affected by the Red Sea incident, the traffic volume of crude oil and refined oil tankers in the Suez Canal has decreased by 25% and 41%, respectively, compared to 2H23 since the beginning of the year, but Russian oil exports have not declined significantly. From January to February 2024, Russian crude oil production was about 10.47 million b/d, a decrease of about 500,000 b/d from before the Russian-Ukrainian conflict, far below the apparent sanctions of 3.6 million b/d in Europe and the US. According to export data, pipeline crude oil exports from Russia to Europe decreased by about 500,000 b/d compared to before the Russian-Ukrainian conflict, but exports of marine crude oil and refined oil products have continued to increase since December 2023. In February 2024, shipping exports rebounded to 5.88 million b/d, which is basically the same level as before the Russian-Ukrainian conflict. On the other hand, the current price of oil has a low premium compared to marginal costs. Taking into account the fiscal balance oil prices of major Middle Eastern producers and the production costs of shale oil in North America, the bank estimates that the marginal cost of crude oil in 2024 may provide the bottom support provided by the marginal cost of crude oil at $80-85 per barrel.

Under the relatively stable benchmark situation of the global economy, current oil prices are relatively reasonable, and the upward risk during the year may be greater than the downside risk

Based on the above analysis, the bank believes that the current crude oil price may be in a relatively reasonable position and maintains the judgment of 85 US dollars/barrel at the center of 1H24 Brent oil price. Production adjustment adapts to a slowdown in demand. Under the relatively stable benchmark situation of the global economy, the bank expects the global oil market to face a supply gap of around 640,000 b/d in 2024. Although seasonal demand pressure may bring about a phased narrowing of the gap and price correction, the bank believes that the risk of rising oil prices during the year may still outweigh the downside risk, and it is expected that the 2H24 Brent oil price center may move upward to $90-95 per barrel. Outside of the benchmark situation, uncertainty about the geographical situation still exists, and supply premiums may not have been taken into account. The bank warned to pay attention to trade disturbances in the Red Sea and Russia's “anti-sanctions” measures against oil supply. On February 27, Russia stated that it will implement a six-month ban on gasoline exports from March 2024. The bank estimates that 3% of global gasoline exports may be affected. Recent geopolitical events have also intensified disturbances in the commencement of Russian refineries. Looking ahead, the bank suggests that if geographical variables further increase supply reduction, it may become a source of risk that oil prices will rise above expectations during the year.