Has Global Oil Price Peaked?

Many people, especially car owners, breathed a sigh of relief as the price of Brent crude oil has plummeted by over 30% since the middle of 2022, but is it safe to say the oil prices have peaked? The analysis of different data suggests otherwise.

Let’s talk about the supply first.

Above all, the United States has less room to hold oil prices down by reducing its Strategic Petroleum Reserve (SPR). In the past six months, the United States has released 140 million barrels of crude oil. The SPR has depleted to just under 400 million barrels, which is the lowest level in the past 40 years. According to the weekly report of the U.S. Energy Information Administration, President Biden’s plan to tame energy costs by releasing SPR will be completed in December 2022. The U.S. Department of Energy in October also formulated a plan to replenish the SPR when the price of crude oil is at or below $67-$72 per barrel. These suggest that there is less and less room to bring down oil prices by selling SPR.

Secondly, the capital expenditure of oil companies has reduced significantly in the past two years, which means future supply may be affected. The annual reports of major global oil companies Chevron and Occidental Petroleum show that their capital expenditures have been well below the depreciation rate since 2020. The short-term benefit of this trend is that oil companies can generate a lot of free cash flow for debt reduction and dividend payments. But the disadvantage is that without sufficient investment, it will be difficult to maintain the future production capacity at the current level, particularly when the United States has increased the production of shale gas and shale oil significantly in the past 10 years. The nature of shale oil fields is different from that of traditional oil fields. Without continuous investment, the annual decline in shale oil production capacity will be faster than traditional oil. Unless oil companies significantly increase capital investment in the future, supply reduction is very likely to happen.

Some may ask, “Didn’t Russia’s oil exports drop due to the sanctions? If Russia resumes production after the war, will that offset the potential supply reduction from oil companies?” Surprisingly, according to the oil tanker tracking data, Russia’s oil exports have increased from the pre-war level in the past six months. The main export destinations are non-G7 countries and non-European regions, with China and India being the primary purchasers. This suggests that even if the Russian-Ukrainian war is over, Russia still has limited room to increase production in the future.

Another point worth considering is the exchange rate of the U.S. dollar. The weakening of the U.S. dollar has a positive impact on oil demand because oil prices will fall in non-U.S. dollar regions. For the time being, leading indicators show that the risk of a U.S.  recession is increasing. In addition, the Federal Reserve is expected to slow the pace of interest rate hikes, which will ease the dollar’s appreciation. A weakening USD will drive oil demand and hence oil prices.

The last factor that may weigh on the supply demand equation is the potential demand from China. China is the second-largest oil consumer in the world. In 2022, China’s economic growth slowed down due to COVID restrictions and the real estate crackdown, which made its oil demand milder. But now, demand from China may pick up again since the government has decided to terminate COVID zero and reopen.  As such, we expect there will be an increase in oil demand in the foreseeable future.

All the factors we have discussed may contribute to the return of higher oil prices, so are there any risks of a decline in prices? At present, the main risk lies in whether the global economy will slide into recession in the coming year. However, comparing that with the above 5 supporting factors, the chance of oil prices rising should be greater than the risk of falling.


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

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