Since the COVID-19 outbreak, driven by large-scale economic stimulus packages in various countries and other factors, international oil prices have rebounded from the bottom since April last year. In stages: prices bottomed out and stabilized from April to October last year, rose relatively quickly from November, and showed rapid rises and falls with volatility in mid-to-late March this year. Improved supply and demand fundamentals laid the foundation for this rebound, financial factors were an important driver of the rapid rise, and the level of pandemic control remains the key variable affecting prices.
Improvements on both the supply and demand sides supported oil prices' rebound from the bottom. From April last year, OPEC and non-OPEC producers including Russia, together forming "OPEC+", reached and implemented the largest production cut agreement in history, initially reducing output by up to 9.7 million barrels per day and sharply tightening supply. Meanwhile, as countries gradually eased pandemic lockdowns, world oil demand rebounded from its trough. The improvement in market fundamentals played an important role in oil prices bottoming out and stabilizing between April and October last year.
Under optimistic supply and demand expectations, factors such as trillions of dollars of economic stimulus have been key to the oil price rise since last November. At the end of last year, resurgent epidemics in many countries held back the recovery of oil demand, while supply from non-OPEC+ producers kept climbing and slowed the drawdown of inventories, so fundamentals offered only limited support to prices. Market optimism, however, gave prices an effective lift: on one hand, vaccine development and vaccination continued to advance and confidence in global economic recovery kept strengthening, markedly improving demand expectations; on the other hand, Saudi Arabia voluntarily deepened its production cuts and the OPEC+ cut agreement was well implemented, markedly improving supply expectations. With these optimistic expectations, and with the United States pushing a USD 1.9 trillion stimulus plan and larger packages to follow, some financial institutions argued that "crude oil is an excellent inflation hedge"; in March this year total open interest in US West Texas Intermediate (WTI) and Brent crude futures reached its highest level since May 2018. Driven by this, oil prices reached a stage high of about USD 70 per barrel in early March this year.
With repeated epidemic waves in Europe, the United States and emerging countries, combined with upward pressure on supply, oil prices have slid and corrected since mid-March this year, with sharper swings around USD 60 per barrel. Vaccination in Europe fell short of expectations and a new wave of infections emerged; renewed lockdowns in many countries dampened oil consumption, which was the direct trigger for the price fall. An upward trend in supply gradually took shape: data showed US oil output recovering, and some shale oil companies are expected to expand capacity with financial backing. At the same time, the OPEC+ ministerial meeting rolled out an output increase agreement; although the first-half increase was smaller than expected, reflecting caution about adding supply, the path to higher supply is now clear. In addition, events such as the Suez Canal blockage had mixed effects on the international oil market, worsening price volatility.
Looking at the oil price trend, prices may fluctuate around current high levels within the year, while in the medium and long term they will come under strong pressure from competition with renewable energy. As more people are vaccinated and vaccine coverage rises faster in the period ahead, the impact of the pandemic is expected to be brought under control across much of the world. Combined with the United States' push for larger-scale infrastructure construction and stimulus plans in other economies, global oil demand is expected to keep recovering in the second half of the year, and improving fundamentals will support prices. At the same time, trillions of dollars of stimulus funds will strongly support risk appetite in capital markets, and prices are expected to fluctuate at high levels within the year. In the medium and long term, with China's carbon peak and carbon neutrality targets proposed and more than 100 economies worldwide having put forward carbon neutrality goals, rapid growth in renewable energy will squeeze the room for oil demand growth and will gradually replace existing consumption in some economies, leaving oil supply and demand fundamentals in a long easing cycle. On one hand, rapidly falling renewable energy costs will strongly suppress oil prices — photovoltaic power generation prices, for example, are expected to fall by more than half from current levels by 2030; on the other hand, buyers will gradually gain the upper hand in the oil market. In the future, international oil prices will gradually settle within a range bounded by the renewable energy price line and the crude exploration and development cost line.
