The Zhitong Finance App learned that China Merchants Securities released a research report saying that as far as crude oil is concerned, although demand is one of the main reasons why they are bullish on oil prices, what is more critical is that OPEC+ regained pricing power after US shale oil capital spending contracted. Back to the present, the upward logic of oil prices has not changed: first, Russia and Saudi Arabia may once again dominate the supply side and are strictly likely to cut production; second, before the dust settles in the US election, shale oil companies' capital expenditure decisions may remain conservative; third, with frequent geopolitical risks after 2022, the probability of an energy supply shock has increased. Furthermore, as long as demand factors do not change and there is no strong incident signal from the supply side, the bank will remain optimistic about oil prices in the short term.

The views of China Merchants Securities are as follows:

How to understand the transfer of crude oil pricing rights?

The growth rate of crude oil demand has remained stable over the past 30 years, and the supply side is the main cause of fluctuations in crude oil. Historically, as long as OPEC (or OPEC+) has the right to price crude oil, its production is generally positively correlated with oil prices, increasing production and suppressing oil prices will not become OPEC's medium- to long-term strategy.

2000-2013: Establishment and maintenance of OPEC cooperation mechanisms to reduce production. After repeated OPEC meetings, observations, and games in 1998-1999, the production reduction mechanism with OPEC as the core gradually gained the trust of various oil-producing countries. Since then, OPEC's demand for cooperative price insurance has been strong. OPEC only moderately increased production during the oil price increase phase, moderately reduced production during the oil price decline phase, and the global crude oil supply was moderately tight to ensure maximum profit in the medium term.

2014-2019: Pricing rights transferred to US shale oil. Shale oil developed rapidly on a large scale in 2011-2014, and OPEC gradually lost its pricing power and often fluctuated between preserved oil prices and guaranteed market share. American shale oil has three characteristics: a shorter production cycle, more marketable, and a downward cost center. The essence of the downward movement in crude oil prices in 2014-2019 is the process of a downward shift in shale oil costs.

After 2020: OPEC+ regains pricing power. After 2020, differences within OPEC+ were gradually resolved and switched to cooperation. The relationship between Saudi Arabia and Iran broke the ice in March 2023, which also enabled OPEC+ to resolve internal differences. After Biden came to power, the supply of shale oil entered a bottleneck period, and OPEC regained its pricing power.

How have historical geopolitics and emergencies affected oil prices?

First, most geological events are transmitted to oil prices by affecting supply expectations, and oil prices will rise in the short term under most circumstances; second, if the supply shock is not realized, oil prices will still be adjusted after the rise, referring to the 2011-2014 Arab Geographic Event. If the supply shock actually materializes or even evolves into a geographical conflict, the rise in oil prices is more sustainable, with reference to 2017-2018; Third, the impact of geographical factors on supply should be weaker than supply game factors in oil-producing countries. Historically, 2000-2007, 2011-2014, 2015-2018, 2000 Geopolitical risk events occurred more frequently during the next four periods of the year, but oil price performance was more factored into supply structure and strategy factors.

The current upward logic of oil prices has not changed. Although demand was one of the main reasons the bank was bullish on oil prices in the past, what is more critical is that OPEC+ regained pricing power after US shale oil capital expenditure contracted.

First, Russia and Saudi Arabia may once again dominate the supply side, and it is likely that production will be cut strictly. After the terrorist attacks, Russia expressed its sincerity in implementing production cuts, and Saudi Arabia is also trying to increase its voice within OPEC+. After 2020, the right to price crude oil was transferred to OPEC+ rather than OPEC, and the attitude of the two major countries, Saudi Arabia and Russia, to cut production had an exemplary effect. The Middle East and Russia have been plagued by wars and climatic factors in the past few years. If they can cooperate in a group to improve the efficiency of production cuts, it is also expected to increase medium-term profits and ease debt pressure.

Second, before the dust settles in the US election, shale oil companies may still be cautious about capital expenditure. The main reason for the surge in US crude oil production in 2023 is caliber adjustments, and it is still unknown whether NGL can once again drive US crude oil production in 2024. At least for the first 3 months, US crude oil production has not improved.

Third, due to frequent geopolitical risks, the probability of an energy supply shock has increased. Geographic risks have been frequent since the Russian-Ukrainian conflict in 2022. After terrorist attacks on the Red Sea-Suez Canal and Russia followed one after another, the probability that the Middle East or OPEC+ will experience a shock in crude oil supply has increased.

Finally, as long as demand factors do not change and there is no strong incident signal from the supply side, the bank will remain optimistic about oil prices in the short term.