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International Oil Price Trend and China's Energy Strategy
The rapid decline in oil prices has had a significant short-term impact on China's overall economy and related industries, but it has also provided my country with a rare opportunity to enhance its energy strategic security and optimize its energy structure. It is necessary to make targeted policy preparations. From the perspective of investors, how to grasp the investment opportunities brought about by oil price fluctuations with minimal risk depends on the judgment of oil price trends and how to execute transactions through appropriate investment tools.In early 2020, the COVID-19 pandemic caused a sudden drop in international oil demand, and the price war in the international oil market was extremely fierce. The price of WTI May crude oil futures contract fell to a negative value for the first time in history. This oil price war is different from what has happened in history. Both the international order of oil supply and the structure of oil demand have undergone new changes. The rapid decline in oil prices has had a significant short-term impact on China's overall economy and related industries, but it has also provided my country with a rare opportunity to enhance its energy strategic security and optimize its energy structure. It is necessary to make targeted policy preparations. From the perspective of investors, how to grasp the investment opportunities brought about by oil price fluctuations with minimal risk depends on the judgment of oil price trends and how to execute transactions through appropriate investment tools.
In December 1960, in order to safeguard the interests of oil-producing countries and weaken the control of international oil companies over oil prices, the Organization of Petroleum Exporting Countries (OPEC) was established. Its main members include Saudi Arabia, Iraq, Iran, Kuwait, Venezuela and other countries. Since then, OPEC has become an important organization that controls international oil prices, and has also begun to fight with international oil companies for oil production and sales rights.
After the establishment of OPEC, until the two oil crises in the 1970s, oil power was almost monopolized by OPEC. OPEC's monopoly on oil exports led to two "oil crises". The first oil crisis was in 1973, when international oil prices rose from US$3.05 per barrel in 1973 to US$10.73 in 1974. The second oil crisis was at the end of 1978, when Iran stopped exporting oil for 60 days, causing a daily shortage of 5 million barrels of oil in the oil market, accounting for about 1/10 of the world's total consumption, resulting in oil price volatility and tight supply. The price of oil in the United States soared from $12.7 per barrel in 1978 to $32.51 in 1981. The oil crisis prompted the West to change its economic strategy and adjust its economic structure, forcing it to speed up the exploration and development of new oil fields to reduce the impact of the oil crisis. On the other hand, the two oil crises also caused great losses to OPEC itself: first, the production cuts and embargoes caused them to greatly reduce oil exports and reduce market share; second, the rise in oil prices caused a split within OPEC. Most member countries advocated following the market and raising oil prices, while Saudi Arabia advocated suppressing oil prices and even significantly increasing production alone to suppress prices. As a result, OPEC lost its ability to regulate the market.
In the 1960s, large-scale oil and gas resources were discovered in the North Sea, and the continued high oil prices in the 1970s created important strategic development opportunities for offshore oil production. The United Kingdom, Norway and other countries also took this opportunity to become important oil producers in Europe and even the world. After the 1980s, with the collapse of the unity of the Organization of Petroleum Exporting Countries and the emergence of emerging oil-producing countries, oil power began to disperse. As countries actively develop oil and gas resources, the oil production of non-OPEC countries exceeded that of OPEC countries in 1982. As oil prices continue to fall, the political power of OPEC countries gradually declines, and oil power returns to the United States, Europe and Japan. Since 2008, high oil prices have pushed high-cost US shale oil into a rapid development stage. In 2019, the United States changed from a long-term net oil importer to a net oil exporter. After the 1990s, as Russia's oil production increased year by year, the world's oil gradually formed a three-way situation led by Saudi Arabia, OPEC, Russia and the United States, and the oil supply formed a diversified pattern.
In terms of demand, the aviation and transportation industries of various countries have been hit successively since the beginning of this year due to the impact of the epidemic, resulting in a drop in global oil demand from 100 million barrels per day in December 2019 to 92 million barrels per day in March 2020. Since China was hit earlier by the epidemic, with the suspension of work and production in various industries, oil demand has begun to decline year-on-year since January; starting from February and March, the epidemic broke out in other countries one after another, and the same situation as in China gradually emerged around the world; in April, the epidemic in the United States and European countries reached its peak and the scale was far greater than that in China, and the suspension of work and production covered almost all industries, so the global oil demand fell to the lowest point since the beginning of this year; as the epidemic gradually dissipates, the industries of various countries will gradually recover, and the demand for oil will also increase accordingly, but the world's oil demand may decline compared with 2019 in the whole year.
The restrictions on the transportation and aviation industries are one of the important reasons for the decline in oil demand. At the beginning of this year, passenger and air transport volumes were almost the same as in 2019, and in some countries they were slightly higher than in 2019. However, since the end of January, due to the impact of the epidemic, China's passenger and air transport volumes have dropped sharply to the lowest point this year, about 30% of 2019. With the return of the Spring Festival travel at the end of February and the gradual resumption of work and production in March, China's passenger and air transport volumes have gradually increased, but since March, due to the worsening epidemic in other countries around the world, global passenger and air transport volumes have declined significantly. By the end of the first quarter, both indicators have dropped to only about 50% of 2019.
On April 20, the price of West Texas Intermediate crude oil futures (WTI), which is scheduled to expire on April 21, plummeted to -$38 per barrel, far below the lowest value of the near-month contract of $10.42 per barrel on March 31, 1983. Although this is related to traders' desire to avoid forced liquidation and is the result of financial operations, the continuous decline in oil prices in global markets also reflects the sharp drop in global oil demand and rising inventory pressure.
Prior to this, international oil prices had just experienced a round of plunge in March this year because Russia interrupted its production cut negotiations with OPEC members and launched a price war with Saudi Arabia, increasing production and lowering prices in order to seize more market share. It was not until April 13 that the OPEC+ meeting reached the largest production cut agreement since its establishment, and the first phase will reduce oil production by 9.7 million barrels per day in May and June this year.
The main reason for Russia's price war is that it is more difficult to cut production. Due to climate and geological reasons, the operating flexibility of Russian oil wells is far less than that of Saudi Arabia, and it is difficult to close and reopen them easily.
Production cuts may cause Russia to lose some oil fields forever. In addition, the long-term energy cooperation between Russia and China is the source of Russia's confidence in starting a price war. According to data released by the General Administration of Customs of China, China's total oil imports in April 2020 amounted to US$10.888 billion, while China's total imports from Russia in the same period amounted to US$55.39 billion. Considering the high proportion of energy in Russia's exports to China, assuming that 80% of China's total imports in April are oil and the price is comparable to other channels, China's total oil imports from Russia in April accounted for more than 40% of total imports.
However, Russia's position in China's oil exports is being challenged by the United States. According to the requirements of the first phase of the China-US economic and trade agreement, China needs to purchase energy products from the United States in 2020 for a total amount of no less than US$18.5 billion. As oil prices continue to fall, even if the US dollar is purchased at a fixed amount every month, the oil purchased from the United States in April can already meet about 15% of import demand. At the same time, competition in other major oil consumption markets around the world is extremely fierce due to a sharp drop in demand in the short term.
Russia has been under long-term economic sanctions from the United States for historical and political reasons and has almost no exports to the United States. Therefore, China and Japan have become the main battlefields for competition between Russia and oil exporting countries such as Saudi Arabia. As the world's third largest oil consumer, Japan's main oil imports come from the Middle East, accounting for about 90%. According to the latest data from the Ministry of Economy, Trade and Industry of Japan, in February 2020, the Middle East accounted for 89.3%, Russia accounted for 3%, and the United States accounted for 1.3% of Japan's oil importing countries and regions.
Among them, the import volume from the Middle East and Russia fell month-on-month, while the import volume from the United States increased month-on-month. Through price wars, Russia can challenge OPEC's dominance in the Japanese market on the one hand, and on the other hand, it can put pressure on other high-cost competitors (such as the United States) to force them to withdraw from the competition.
1985. In 1981, Reagan entered the White House and began to prepare and implement the "reverse oil shock" strategy to contain the Soviet Union. The United States pressured Middle Eastern countries to increase production, keeping international oil prices low, thereby cutting off the Soviet Union's main source of funds and dragging down the Soviet economy. International oil prices fell from $27.01 in 1985 to $13.53 in 1986, and remained at a low level in the following years. According to official statistics from the Soviet Ministry of Energy at the time, the decline in world oil prices from 1985 to 1988 caused the Soviet Union to lose a total of 40 billion rubles, which became an important reason for the subsequent disintegration of the Soviet Union.
The second oil price war occurred in 1997. In 1990, Venezuela's oil production also soared from 2.24 million barrels per day in 1990 to 3.32 million barrels per day in 1997. Such overproduction caused dissatisfaction among other OPEC countries. In December 1997, Saudi Arabia joined other OPEC countries to increase production, and the price of oil also dropped from $18.68 to $12.28, the lowest in the past 20 years. The increase in production of oil countries was accompanied by the financial crisis, and the oil demand side was also greatly impacted.
The third oil price war was in 2014. Since 2008, US shale oil has entered a period of rapid development. In 2014, the United States surpassed Saudi Arabia and Russia to become the world's largest oil producer. As the production of shale oil in the United States continues to increase, the oil market share of OPEC countries has been gradually eroded, and its position in the international oil market has gradually declined. At the same time, Saudi Arabia failed to persuade non-OPEC countries including Russia to join the production reduction plan. This series of reasons made Saudi Arabia decide to increase production, and the international oil price also plummeted from $96.29 to $40.76. This price war against US shale oil producers has led to dozens of US oil and gas companies filing for bankruptcy.
Throughout the history of oil price wars, the main reasons for their occurrence are geopolitical or mutual games between oil-producing countries. Although affected by short-term supply and demand balance, it is not a simple market behavior.
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