8 Economists' Investment Tips
She Jianyue: “The Logic of Oil Prices” - Global Oil Supply and Demand Balance Sheet
Summary of this issue
· The world's top three petroleum research institutes
· Comparative analysis of EIA and OPEC monthly reports
What's in this issue
Today I would like to share with you some personal experiences on the topic of oil prices and the logic behind oil prices. I hope it will be helpful to you in constructing transactions and trading strategies.
I'll probably introduce it from four aspects. The first aspect is to talk about the global oil supply and demand pattern. This is the biggest macro fundamental aspect. Second, I want to establish a link between oil supply and demand patterns and global geopolitics. On the third aspect, I would like to introduce a model of the relationship between fundamentals and price differences. Through this model, I would like to explain the operating mechanism of oil prices and the logic behind it. The fourth aspect is to talk about some of my personal routine of analyzing oil prices on a daily basis, as well as an outlook for oil prices in 2019 or 2020.
First, in terms of the largest macroeconomic fundamentals research, every researcher wants to get a fundamental balance sheet of supply and demand, and petroleum is no exception as a commodity. However, the number of countries and data involved in this balance sheet is very large, and there is definitely not enough energy to do it ourselves, so generally speaking, we use some existing, large, and mature institutions, and then add some of our own tracking and analysis judgments on the basis of institutional data to build our own basic balance of supply and demand.
There are three major public petroleum agencies. The first is the IEA, which is the International Energy Agency; the second is the EIA, the US Department of Energy's Energy Information Administration; the third is OPEC (OPEC), which also has a strong technical analysis department that dynamically tracks the global crude oil market every month, and then draws up a balance sheet from the perspective of oil producers.
These three institutions have some basic concepts on the supply side. We can see that on the supply side, they are divided into OECD countries (OECD) and non-OECD countries (NON-OECD), also known as developed economies and underdeveloped economies. This kind of split, I think people might need to further understand it, why? Because we can see that the world is divided in this way, even though the concept of a third world was later proposed.
Through this split of the fundamentals of oil supply and demand, we can see that the weight between developed and underdeveloped economies is very critical, as this will involve core demand issues. Therefore, from the demand side, if the GDP growth of non-OECD countries exceeds its weight, or is catching up with the OECD countries, then there will be some major changes in global energy demand and even oil demand.
The supply side is divided into two categories: the Organization of Petroleum Exporting Countries, also known as OPEC, and non-OPEC, that is, non-oil exporting countries. This conceptual division is because the former Organization of Petroleum Exporting Countries, or OPEC, should have played an important role in global oil supply, but this division is now also facing a challenge, and everyone is probably aware of it. That is, is OPEC still not the real market leader now? This might be a bit problematic, and we'll talk about that later.
But no matter what, we still need to understand the basic concept of the current mainstream institutions, whether on the supply side or the demand side.
Let's first take a look at the supply-demand balance sheet announced by the EIA in March 2019. The first is supply-side data. As we can see, it is done in strict accordance with its logical definition; the second part is demand-side, because if there is supply, there is demand to match.
Most importantly, we should note that the EIA belongs to the United States. The US actually represents a consumer country, so this chart probably focuses more on a balanced state of global oil supply and demand, which is the so-called change in global inventories. At the same time, we should also pay attention to the inventory in the OECD countries, which has some more accurate and timely data for your reference.
In March 2019, the EIA believed that global oil supply was relatively loose, but in May it began to change. Some incidents occurred in May. First, the US lifted the exemption on Iranian oil imports, while Venezuelan oil production declined, which led to some changes in global production capacity. Moreover, this kind of geopolitical influence is likely to continue; it is not something that can be solved in a month or two, so the EIA supply-demand balance in May clearly reflects these events.
We can see that in 2018, the EIA thought the supply of oil was loose. By May 2019, it had moved from the loose view in March to the tight view, but for 2020, it still believes that the supply of oil is relatively loose.
In the EIA monthly report, also known as the short-term energy outlook monthly report, another indicator that needs everyone's attention is remaining production capacity. In March 2019, the EIA still thought that the remaining production capacity was quite high, at least higher than the annual average of the past 5 years, but by May, if you take a look again, its forecast for remaining production capacity is already significantly lower than the average of the past 5 years.
EIA has a definition of remaining production capacity, that is, how many days, for example, 3 months, you must be able to continuously supply production capacity for more than 9 months. This is what is called surplus production capacity, that is, it must be effective. For the specific time, let's take another look at the definition of EIA.
As we can see, the balance sheet given by the EIA is very comprehensive. We can not only see the classification according to its broad categories, such as OPEC and non-OPEC, but also the tracking of important oil producers, the United States, Russia, China, etc., and also shows the dynamic balance of demand in demand-side OECD countries and non-OECD countries. However, there is also a lot of basic data behind the table, and the balance analysis of supply and demand is carried out by country.
Let's look at another agency, OPEC, which we are talking about. There is a concept in its balance sheet called OPEC Call, what does it mean? It's not like the EIA and IEA use reduced supply and demand to measure the balance between supply and demand. Instead, they use global oil demand to subtract non-OPEC production, then subtract OPEC's natural gas liquid production, and finally obtain OPEC's demand for crude oil. In other words, if OPEC's crude oil production exceeds OPEC Call, it means there is an oversupply.
In fact, I personally think that the most critical thing about this number, or balance sheet, is that we can see a suggestion from OPEC's technical department, or a view of the balance between global oil supply and demand from the perspective of oil-producing countries, and this view will be used as a technical guide for OPEC's revised production policy. So let's not think that the OPEC report is complete after reading it. From feedback from technical departments to decision makers, such as when oil ministers go to discussions, including when they want to set production reduction targets, this is a report with reference value.
From OPEC's April monthly report, we can actually feel that the second quarter of 2019 was actually already in short supply. The first quarter was basically balanced. Currently, in the second quarter, we saw production in April was only 30 million b/d, which is significantly less than OPEC Call in the second quarter. If this is the case, OPEC sees that the market in the second quarter may have gone out of inventory.
The OPEC+ meeting was held on May 19, a ministerial-level production reduction supervision meeting of the Production Reduction Alliance. At this meeting, I think OPEC definitely thinks that the effects of production cuts are good; the current situation is also in short supply. But what's the problem? What we see from this report is a pessimistic expectation. In the fourth quarter, OpecCall's value is actually not high. In other words, this will probably be an ambiguous meeting. It must not only acknowledge that production cuts are effective, but at the same time reduce production too much and cause current supply constraints, but based on pessimistic expectations for the second half of the year, they are likely to maintain this production reduction, or adjust its production cuts according to a balanced situation.
We can see that there is also an actual production table for each OPEC member country in the OPEC monthly report. The following is the monthly report for April 2019. Statistics show production in March. We can see that Saudi Arabia, as OPEC's largest oil producer and oil exporter, had the same production in April as in March, or 9.8 million b/d. However, the level of 9.8 million b/d is a bit too much for the Saudis. In fact, if Saudi Arabia fulfills 100% of the contract, it should have been 10.3 million b/d, reduced to 9.8 million b/d, which is equivalent to the Saudis themselves contributing, reducing it by an additional 500,000 b/d.
Now, with the deepening of sanctions against Iran, Iran's oil exports have been further reduced. Everyone expects that it will probably be 500,000 b/d less than in March. This can create a natural balance. Even if the Saudis say that I will cut production 100%, it actually means that it can increase production by 500,000 b/d compared to April. This is also one of my recent opinions. That is to say that Iran's supply cuts, including Venezuela's oil production in April, were basically the same as in March, and there was no further decline, making the current situation seem a bit complicated. In other words, there is actually an appropriate increase to make up for the reduction.
This is a brief comparative analysis of the monthly reports of the two organizations. I think this monthly report requires continuous tracking and observation by everyone.
That is the content of this course, thank you all.
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