Experts predict that there is limited room for oil price increases in 2019!



【Summary】Since the fourth quarter of 2018, international oil prices have changed the upward trend of previous shocks and continued to fall for 7 consecutive weeks. The futures prices of West Texas Light Crude Oil (WTI) and Brent Crude Oil have increased from US $75/barrel and US $85/barrel respectively. The four-year phase highs have fallen sharply to US $52/barrel and US $62/barrel, both of which are about 30%.

Since the fourth quarter of 2018, international oil prices have changed the upward trend of previous shocks and continued to fall for 7 consecutive weeks. The futures prices of West Texas Light Crude Oil (WTI) and Brent Crude Oil have increased from US $75/barrel and US $85/barrel respectively. The four-year phase highs have fallen sharply to US $52/barrel and US $62/barrel, both of which are about 30%.

The analysis believes that the continued rise in international oil prices in the first 10 months of 2018 is due to factors such as the intensification of US sanctions against Iran, the decline in production in oil-producing countries such as Venezuela, and OPEC's production cuts. On the whole, it is still a short-term factor. In the medium and long term, shale oil will lead the growth of global crude oil supply potential, the expansion of crude oil demand market is limited, the expected appreciation of the US dollar exchange rate and the development of alternative energy under higher oil prices will inhibit the continuous rise of international oil prices. The increase in shale oil production leads the growth of crude oil supply. As the international oil price showed a continuous upward trend in the first three quarters of 2018, the upstream development of the global oil and gas industry is generally favorable, which brings new opportunities to the development of shale oil in the United States, which has a large number of participants, flexible operation and operates in full compliance with the market economy, and will further lead the growth of global crude oil supply in the future.

From a production perspective, from 2014 to 2018, the full cost of a single barrel of U.S. shale oil has fallen from $76/bbl to $50/bbl at an internal rate of return of 15%, and the significant decline in costs has contributed to its faster production growth at this stage of the oil price level. The U.S. Energy Information Administration (EIA) drilling production report said that in the fourth quarter of 2018, U.S. shale oil production reached an all-time high of 7.6 million barrels per day; the Permian Basin was the absolute protagonist of shale oil production growth, with production reaching 3.5 million barrels per day in the fourth quarter. In addition, according to data from Baker Hughes, an oil service company, as of October 2018, the number of oil rigs in production in the United States was 861, remaining above 860 for four consecutive months. From a technical point of view, the continuous improvement of shale oil development drilling and completion technology during the current round of low oil prices has a broader application space in the oil price recovery stage. Among them, the number of wells drilled per unit area has increased significantly, and super well sites with more than 60 wells have become the development trend. The "one-trip drilling" capacity continues to improve, the drilling and completion cycle continues to shorten, and the drilling and completion cost is effectively controlled. The length of horizontal section of horizontal wells increases year by year, and the number of fracturing segments and clusters increases; The production effect of proppant and fracturing fluid is increasingly obvious. From the perspective of investment and industry, technological progress will further improve the investment efficiency of shale oil in the future. According to experts from consulting firm Wood McKinsey, at this stage, there are about 8000 production wells in the United States that have been drilled but have not yet been fractured, saving $10 billion in investment through technological advances.

In addition, shale oil production also follows the U.S. energy industry's industrial development model of "small companies rely on technology, large companies on scale", with oil giants such as Shell, Chevron, ExxonMobil and BP intervening on a large scale in the shale oil industry, production will continue to grow in the future. In addition to shale oil production growth, from 2017 to 2018, the phased recovery in oil prices led to a gradual increase in global upstream exploration and development investment, which will also become an important factor affecting future crude oil market supply.

According to Wood McKinsey's analysis, since 2018, oil companies have generally adapted to the oil price level of $50/barrel through technological innovation to reduce costs and increase efficiency, repair balance sheets and maintain strict investment discipline; at the Brent oil price of $60-80/barrel, oil companies' upstream exploration and development investment will continue to increase, opening a new round of investment cycle in the oil industry. Rystad, a Norwegian energy consultancy, predicts that global upstream oil and gas investment will re-enter a stable growth phase in 2018 and will continue to increase global crude oil production in the future. According to Global Data data, the 615 oil and gas projects to be launched around the world are expected to have a total investment of US $1.7 trillion billion and will produce more than 88 billion barrels of crude oil from 2018 to 2025. Brazil, the United States, Russia, Nigeria, Australia and Canada and other countries will see a certain increase in crude oil production in the future. In recent years, in order to deal with climate change and other issues, the international community has reached a series of global environmental governance consensus, including the Paris Agreement, and most countries have actively implemented low-carbon development strategies. Australia, South Africa and most of the northwest European countries began to implement carbon tax, carbon emissions trading mechanism, 13% of the world's greenhouse gas emissions are covered by carbon pricing. The demand for crude oil consumption with relatively high emissions is beginning to be constrained by environmental protection, and the related costs of future development will continue to increase.

The BP World Energy Outlook (2018 Edition) report estimates that the growth rate of crude oil demand will gradually decrease and may stop growth in 2025. The International Energy Agency's (IEA) sustainable development scenario, based on the sharp tightening of climate policy, also points out that global crude oil demand may peak in the mid-2020s. The oil company's emphasis on natural gas business objectively reflects its understanding of the oil and gas demand market. Shell said that in the next 20 years, the proportion of natural gas business plans to increase to 75%; Total and Chevron also said that in 2035, natural gas business will account for more than 60% of the company's total business. In addition, under the existing technology and energy supply conditions, more and more liquefied natural gas (LNG) trucks, ships and electric vehicles are put into use, which will also reduce crude oil consumption in the near and medium term. The gradual improvement of energy efficiency is another reason for the limited expansion of the global crude oil demand market. David Ayton, chief technology officer of BP, said that in terms of energy efficiency improvement, through the popularization of energy efficiency technology, the total global primary energy consumption, including oil and gas, is expected to be reduced by 40%, and the improvement of automobile fuel efficiency in 2035 can reduce the demand for crude oil by about 17 million barrels per day. Bernstein Research also said that the improvement of automobile fuel efficiency in 2030 can reduce the demand for crude oil by nearly 30 million barrels per day. Wood McKinsey said that gasoline demand in the context of energy efficiency is expected to be the primary factor in the peak demand for crude oil around 2030.

In addition, the International Energy Agency's Global Energy Efficiency Report (2018) released in October 2018 shows that with the relevant capital investment and the proper coordination of technologies and measures, freight trucks alone can provide about 40% of the energy saving potential. Can significantly reduce crude oil demand. In fact, nearly US $240 billion billion of global funds have been used to improve energy efficiency in transportation, industry and other sectors in 2017, which will also have a dampening effect on global oil and gas demand in the future. The appreciation of the US dollar is expected to restrain the rise of oil prices from the pricing system. Since the second quarter of 2018, the US dollar index has bottomed out and rebounded, showing a volatile upward trend in general, and is now basically stable above 95.

There are four main reasons for the rise of the US dollar index: first, the overall improvement of the US economy and the tightening of the labor market, especially in the second quarter of 2018, the (GDP) of the US gross domestic product was as high as 4.2, and the unemployment rate was less than 3.8. Second, the implementation of tax cuts in the United States has significantly increased the supply of high-yield treasury bonds, thus enhancing the attractiveness of US dollar assets and helping the US dollar to return to the US dollar to the US market; third, since 2018, the global economic growth rate has shown signs of decline, especially in Europe, signs of economic recovery have weakened, inflation recovery and easing exit practice is lower than expected, but also stimulate some of the global liquidity capital to buy dollar assets; fourth, some safe-haven funds will continue to buy dollars, will also promote the appreciation of the dollar. In fact, since 2018, the currencies of developed economies such as the euro and the British pound have depreciated by more than 5% against the U.S. dollar; the currencies of emerging economies such as the Brazilian real, the Mexican peso, the Indian rupee, and the Thai baht have also depreciated significantly against the U.S. dollar. The exchange rate trend of the US dollar against other major currencies can also reflect the market's confidence in the expected appreciation of the US dollar exchange rate in the future. From the point of view of the duration of the appreciation cycle of the US dollar exchange rate, since the 1980 s, the duration of the two appreciation cycles of the US dollar exchange rate has exceeded several years, and the growth rate of the US dollar index has reached 50% to 100. It can be seen that if the trend of the US dollar exchange rate entering a new round of upward cycle at this stage is confirmed, the US dollar may remain strong for a long time in the future. Due to the existing "petrodollar" pricing system in the international crude oil market, there is a clear negative correlation between international oil prices and the dollar exchange rate. Even if there is no substantial change in the supply and demand of crude oil in the market, the fluctuation of the US dollar exchange rate can objectively directly cause the rise and fall of international oil prices. Therefore, under the market expectation that the US economy will steadily support the stable appreciation of the US dollar exchange rate in the near and medium term, the US dollar exchange rate will have a certain inhibitory effect on the rise of international oil prices during its rising cycle. Higher oil prices may trigger disruptive energy market changes From the perspective of technological innovation, historically, international oil price trends have been positively correlated with oil companies' investment in technological research and development. Taking the upstream sector of oil companies as an example, most of the increased investment during the period of high oil prices is not only used to improve the level of investment in exploration and development, but also part of it is used to increase the research and development of upstream oil and gas related theories and technologies, and gradually promotes the sustainable development of the oil and gas industry in the later stage. The development of production technologies such as shale oil and gas exploration and development technology, coal-to-oil gas and biomass fuel are more or less related to high oil prices. If oil prices remain high and fluctuate, technological innovation at a relatively high level of investment will certainly play a greater role in the process of oil and gas development in the future, through new geological theories, new exploration technologies, and enhanced oil recovery technologies. to promote the continuous increase in global oil and gas production and the continuous reduction of costs, so as to expand the supply scale of the crude oil market and ultimately restrain the medium-and long-term rise in international oil prices. From the perspective of alternative energy, on the one hand, during the current round of low oil prices since 2014, producers such as coal-to-liquid and biomass fuels have generally practiced hard at the scientific and technological level in order to reduce the adverse impact of low oil prices on the company's production and operation, and the full cost per unit of output has been significantly reduced compared to a few years ago. According to the estimation of relevant experts of Shenhua Group, at this stage, the unit output of some coal-to-liquid in the world has a certain profit in the oil price range of 50-60 US dollars per barrel. According to its good coal mining endowment and production and operation technology, Shenhua Ningmei coal to liquid project has a good internal rate of return in the oil price range of 40-50 USD/barrel per unit output. Therefore, if the international oil price maintains a high operating range, the output of most coal-to-liquid and biomass fuels in the market will increase significantly, which will objectively increase the supply of crude oil in the market, thereby affecting the high growth of international oil prices. But on the other hand, maintaining international oil prices at a high level for a long time may bring disruptive changes to the global oil industry. Under high oil prices, various energy companies, including oil companies, have generally increased their attention and investment in non-oil and gas energy such as wind, solar and geothermal.

Historically, from 2002 to 2014, the rapid development of the global wind power generation and photovoltaic power generation industry was largely derived from the strong trend of international oil prices. Since 2014, through technological progress and management optimization, the cost of some new energy projects such as wind power and optoelectronics has continued to decrease, and it has begun to be competitive with traditional oil and gas projects. According to Wood McKinsey statistics, from 2014 to 2016 alone, seven international oil companies, including Chevron, Shell, ExxonMobil, Total, Eni and BP, have invested or plan to invest in low-carbon energy projects with an average internal rate of return of nearly 15%. The average internal rate of return of Chevron's investment in low-carbon energy projects such as wind and solar energy is as high as 23%.

With the continuous high operation of international oil prices and the deepening of global environmental governance, all kinds of new energy may usher in a new round of rapid development, which will compete with oil and gas on the energy supply side, thus affecting the rise of international oil prices. On the demand side, long-term high oil prices will also stimulate the continuous expansion of the market scale of electric vehicles, shared travel and other industries. If it further develops towards informatization and intelligence in the future, it will inevitably cause structural changes in global energy demand, and oil demand may be sharp. Decline, or it will have a disruptive impact on the oil industry in the medium and long term, and fundamentally change the upward trend of international oil prices. As Wood McKinsey pointed out, "if self-driving cars are commercialized by 2030 and widely accepted by 2035, the impact on crude oil demand will be far beyond people's imagination". (From China Energy Network)

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