Global crude oil inventories are historically low and continue to go out of storage, contributing to the high operation of oil prices: according to our calculation of oil prices and crude oil inventory data from 2010 to 2022, OECD commercial crude oil inventory and US commercial crude oil inventory show a high linear fit with Brent crude oil price, and the correlation coefficient reaches -0.7 ~ -0.8. There is a significant negative correlation between crude oil inventory and Brent oil price. If crude oil inventories continue to decline, it usually means that oil prices will continue to rise. After the outbreak, with the recovery of global crude oil demand and the large-scale production reduction of OPEC + alliance, the global crude oil inventory went to storage significantly. In 2022, the OECD commercial crude oil inventory fell to the low point of the past 10 years, and the destocking rate is still about 500000 barrels / day. As of April 2022, the total crude oil inventory (commercial + strategic reserve) of the United States has been less than 1 billion barrels, which is the lowest point in recent ten years. The destocking rate of commercial crude oil in the United States is 300000 barrels / day. At present, the U.S. strategic crude oil inventory has also been at an all-time low. If it is released at the rate of 1 million barrels per day for six months from May to October 2022, the U.S. strategic crude oil inventory will reach the historical low since the establishment of the U.S. Treasury in 1982, with limited further release capacity and help the high operation of oil prices.
Limited growth of capital expenditure and tight supply of crude oil: insufficient investment in the upstream of global crude oil in 20152021 led to the current shortage of crude oil supply. The recovery of oil price in 2021 did not drive the enthusiasm of upstream capital expenditure. The oil price rose further in 2022. Since the beginning of 2022, Brent’s average price has been $100 / barrel, an increase of 41% compared with that in 2021. Most of the six international oil giants and five large shale oil companies in the United States we counted have increased capital expenditure, but the capital expenditure plan in 2022 has only increased by about 24% on average compared with 2021, which is still significantly lower than the level before the epidemic in 2019. The output is planned to increase by 2022, but the output growth is limited and lower than that of capital expenditure. We believe that during the transformation of the old and new energy structure, the demand for crude oil may reach a peak after 2025. If we increase investment now, the development and production cycle of traditional oil fields will take 3-5 years, but the demand will decline after putting into operation, and the long-term return rate of traditional crude oil projects is uncertain. In the face of this problem, European oil companies have made drastic green energy transformation and reduced oil and gas production. Although American oil companies adhere to traditional oil and gas, due to low-carbon, policy and other factors, the growth of capital expenditure is limited, which corresponds to the limited growth of crude oil production. The Limited production caused by insufficient capital expenditure will exacerbate the shortage of crude oil supply.
The impact of the Russian Ukrainian conflict on the crude oil market may be reflected in May: before the Russian Ukrainian conflict, Russia’s crude oil production reached the capacity bottleneck. After the war, with the withdrawal of foreign capital, Russia’s upstream capital expenditure will further decline, resulting in a decline in crude oil production capacity and actual production. About 50% of Russia’s crude oil and refined oil are exported to Europe. The Russian Ukrainian conflict and European and American economic sanctions will have a great blow to Russia. At the same time, based on the long-term decentralized crude oil import structure of China and India, as well as the construction of infrastructure such as pipelines, ports, docks and ships, as well as financing payment means, high transportation costs and reputation risks, It is difficult for Asia to fully undertake the amount of crude oil transferred from Europe. We believe that the impact of the war on the production and export of Russian crude oil will gradually appear from May 2022, the supply will drop by 3 million barrels / day, the oil and gas trade flow of Russia, China, Europe and the United States will also change, and the conflict between Russia and Ukraine will have a sustained and far-reaching impact on the crude oil market.
The output of OPEC + alliance is lower than expected, and the supply elasticity decreases: according to the current production increase rules, the overall OPEC + alliance can increase the crude oil output by 3.6 million barrels / day in September 2022 compared with the beginning of 2022. However, in the actual implementation, there is differentiation within the OPEC + alliance, and it is difficult to achieve the production increase target in 2022. Saudi Arabia and the United Arab Emirates have the ability to increase production, but they hope to maintain high oil prices and refuse to speed up the rate of increase. For Russia, Angola, Nigeria and other countries, there have been many times that the increase in production is less than the target or even the output has decreased, but they are unable to increase production. In the medium and long term, the remaining capacity of Saudi Arabia and the United Arab Emirates is also limited. Saudi Arabia plans to increase its crude oil production capacity from 11.5 million barrels / day to 13 million barrels / day in the next five years, with an annual planned capacity increase of only 300000 barrels / day. The United Arab Emirates plans to increase its production capacity by 1 million barrels / day in 3-5 years. The development and production cycle of traditional oil fields is as long as 3-5 years, and the elasticity of crude oil supply decreases.
There are differences in U.S. capital expenditure plans, and there are bottlenecks in the limited increase of crude oil production: according to the survey of the Federal Reserve Bank of Dallas, the overall willingness of U.S. shale oil companies to increase production is not strong in 2022, and the most core factor limiting the increase of shale oil production is capital. The return of capital to major U.S. investors will be more stringent under the constraints of shale companies. However, at the same time, high oil prices are also an important incentive to increase production. There are differences in the future development plans of shale oil companies. For companies with high expenditure and high production, mergers and acquisitions or overseas high-quality blocks have become the main contribution source of output growth, while the increase in production of shale oil blocks of the company itself is limited. For low yield companies, dividends or debt repayment become the main destination of cash flow, and capital expenditure is used to make up for losses, inflation and rising costs. On the whole, after the rise of oil price in 2022, the capital expenditure of shale oil companies has increased, but there are differences. The overall increase of shale oil production in the United States is relatively limited, and the problem of insufficient stamina is prominent. In addition, in the face of rising oil prices and inflationary pressure, the Biden government decided to liberalize the oil and gas leasing of federal land in April. However, considering that the proportion of oil and gas production of federal land is very small, the amount of land leasing approved this time is small, and the implementation of the ban on land leasing by the Biden government is limited. According to the statistics of the US Bureau of land management, in 2021, the number of US federal land leases put into operation accounted for only 66% of the total lease volume, and the area of leased land put into operation accounted for only 51% of the total lease area; The number of drilling licenses approved and put into operation on US federal land accounted for only 34% of the total approved in 2021; By February 2022, the United States has approved 8340 unused drilling licenses. We believe that at present, American energy companies hold a large number of leased land and drilling licenses that have not been put into operation or used. The Biden government abandons the clean energy plan, significantly reverses the direction of energy policy and liberalizes the lease and sale of federal land in the United States. In the short term, it has a limited impact on the crude oil production capacity of energy companies and cannot directly accelerate the substantial increase of shale oil production. In the long run, according to the long-term outlook forecast released by EIA in March 2022, due to the problems of investment scale, technical bottleneck, rising operating costs, resource block quality, pipeline transportation infrastructure and so on, the production capacity of shale oil in the United States will also have a bottleneck after 2023, which is expected to reach a peak of 13.5 million barrels / day, with an additional production capacity of 2 million barrels / day, and then there will be output decline.
Under the high oil price, the growth rate of global crude oil demand slows down, but it will continue to grow: considering the conflict between Russia and Ukraine and the high oil price slowing down the process of global economic recovery, IEA continuously lowered the expectation of global crude oil demand in 2022 in March and April 2022, from 100.5 million barrels per day to 99.35 million barrels per day, down from 320 to 1.9 million barrels per day compared with the year-on-year growth in 2021.
We define the growth rate of global crude oil demand / global GDP as the “elasticity coefficient of global crude oil demand / GDP”. Considering that 2022 is in the post epidemic repair stage, we expect the elasticity coefficient to be further reduced to about 0.6. According to the IMF’s latest forecast of global economic growth of 3.6% in 2022, we expect the growth rate of global crude oil demand to decline to 2.16% in 2022, The corresponding increment of crude oil demand in 2022 is about 2 million barrels / day. Considering that the global economy will basically return to the pre epidemic level in 20232025 and the proportion of oil in the global energy consumption structure will gradually decline, we predict that the elasticity coefficient of crude oil demand / GDP will gradually decline by 0.4-0.5 in 20232025, lower than the central level in 20 Yifan Pharmaceutical Co.Ltd(002019) . According to the IMF’s latest forecast of global economic growth of 3.6% in 2023, we predict that the annual increase in crude oil demand from 2023 to 2025 will be about 1-1.5 million barrels / day.
The global supply and demand gap will exist for a long time, and the operation center of high oil prices will rise: before the war, the global crude oil supply and demand gap already existed in 2022 and will maintain the trend of destocking. After the outbreak of the conflict between Russia and Ukraine, changes have taken place at both ends of global crude oil supply and demand. We believe that even considering the slowdown of demand recovery, the gap between global crude oil supply and demand will further increase and the upward channel of oil price will be opened again. In the medium and long term, the development and production cycle of traditional oilfields in the Middle East is long, and the annual supply of new crude oil is limited; Affected by energy policy, investor pressure, rising costs and loss of high-quality blocks, the long-term production capacity of shale oil in the United States is limited and there are bottlenecks, and there is a demand for strategic replenishment in the United States in the next few years; Pressure on European oil companies to reduce production; Russia will accelerate the decline of production capacity due to insufficient capital expenditure, and long-term production may decline. We expect that even considering the slowdown of economic growth and the transformation of old and new energy sources, the global crude oil demand will maintain an annual increment of 1-1.5 million barrels / day from 2023 to 2025, and the crude oil supply capacity is difficult to meet the demand increment. Therefore, we believe that in the medium and long term, the global crude oil supply and demand gap will exist for a long time, the oil price will operate at a high level for a long time, and the center will continue to rise.
The production capacity cycle leads to great energy inflation and is optimistic about the historic allocation opportunities of energy resources such as crude oil: whether it is traditional oil and gas resources or American shale oil, capital expenditure is the main reason for limiting crude oil production. Considering that the global capital expenditure on crude oil is insufficient for a long time, the elasticity of global crude oil supply will decline. In the transformation of old and new energy sources, the demand for crude oil is still growing, and the world will face the problem of crude oil shortage for many years. The international oil price will usher in an upward turning point in 2022. In the medium and long term, the oil price will remain high for a long time, and the energy resources are expected to be in an upward cycle in the next 3-5 years. We will continue to be firmly optimistic about this round of energy inflation, Continue to be firmly optimistic about the historic allocation opportunities of energy resources such as crude oil under the capacity cycle. We believe that the oil price will remain high for a long time in the next few years, and the oil price center will rise, which is good for the upstream sector.
With the continuous realization of high oil price + undervalued value + high dividend, CNOOC has ushered in a historical opportunity: CNOOC maintains a relatively strong cost competitive advantage, which enables the company to continue to make profits under the low and medium oil price level, improve profits and resist the risk of oil price fluctuation. We believe that the current global offshore oil service industry is still relatively surplus. Although the oil price rises, the increase of oil service operating expenses is limited. At the same time, according to our calculation, the depreciation and amortization of barrel oil of the company’s newly put into operation oil field projects continues to decline, which reflects the improvement of the company’s capital expenditure efficiency and continues to consolidate its comparative competitive advantage. On the other hand, driven by China’s policy of increasing reserves and production and the “seven-year action plan” of CNOOC, CNOOC will maintain a steady growth in crude oil production, and the growth of oil and gas production will further expand the company’s performance scale. Offshore oil and gas exploitation started late and has great potential, which further laid the company’s sustainable development ability. At the same time, regardless of horizontal or vertical comparison, the PE valuation of CNOOC A shares and H shares has significant room for repair. The company promises to provide absolute income guarantee with a dividend payment rate of more than 40% and a high dividend of no less than HK $0.7 per share (including tax). We maintain the “buy” rating of CNOOC A shares and H shares.
Risk factors: repeated epidemic, economic fluctuation and downward risk of oil price; Economic sanctions and geopolitical risks.
