Against the backdrop of the recent U.S. mid-term elections, Biden is eager to release a signal of cooling oil prices, not only accelerating the pace of interest rate hikes, but also trying to bridge the gap between crude oil supply and demand by raising interest rates. Gasoline taxes, cut exports, a visit to Saudi Arabia, and a move forward with the U.S.-Iran deal. However, we believe that these measures are difficult to truly change the tight balance of crude oil supply and demand in the short term. The recent drop in oil prices is mainly due to the substantial weakening of the financial properties of oil, but crude oil is still in a backwardation stage, indicating that the fundamentals are still tight.

1) The United States: The carbon reduction movement, the growth of crude oil production is slow.

The key to the slow growth in U.S. crude production is the lagging recovery in capital spending in the shale oil extraction industry. The core reason is that the campaign-style carbon reduction implemented by the United States has led to a tightening of the regulatory environment, the withdrawal of external capital, and investors' increasing emphasis on capital discipline. Streams prioritizes repayment of large maturing debts and is more cautious in investment decisions. At the same time, the epidemic and the policy environment have caused a series of problems such as labor shortages and supply chain delays, which not only restrict the expansion of production, but also increase the decision-making cost of enterprises.

2) Russia: The embargo in Europe and the United States has led to a decline in crude oil production.

In the short term, under the background of the embargo on Russian crude oil from Europe and the United States, Russia's crude oil exports have smoothly shifted to the Asian market, and the overall exports have not been affected. However, as refined oil mainly flows to Europe and the United States and other countries, Russia has not yet found an alternative export channel, and the export of refined oil continues to decline, resulting in a decrease in Russian crude oil production. Russian crude production rebounded slightly in May after falling by 1 million bpd in April and is expected to fall by 700,000 bpd in June from March. It is expected that with the formal implementation of the oil import ban in 2023, the potential crude oil supply gap in the future may expand to 2 million barrels per day.

3) OPEC: increase production cautiously, new crude oil supply is limited

From the perspective of idle production capacity, except for Saudi Arabia, Iraq, and the United Arab Emirates, other countries have insufficient room to increase production. In May of this year, the actual production of the 10 OPEC countries was 1 million barrels per day lower than planned. In an optimistic scenario, the maximum potential supply that OPEC 10 could unleash is 2 million barrels per day. If the United States and Iran reach a deal in the future, it is expected that Iran's crude oil supply will increase by 1.5 million barrels per day, but it will take 1-2 years to fully realize it.

4) Different countries have different rhythms of repair demand, and resilience still exists during the year

From a global perspective, under the influence of supply chain delays and the impact of the epidemic, the recovery pace of crude oil demand in different countries is different, and demand is still resilient in the short term. Europe and Japan have yet to return to normal levels, and China is in the post-pandemic recovery phase, with seasonal demand rising in the second half of the year, and oil demand continuing to increase this year. According to EIA estimates, global oil demand rose by 1.35 million barrels per day in the third and fourth quarters, an increase of 610,000 barrels per day.

Based on the above reasons, it is expected that the tight supply and demand situation in the second half of the year will continue, the room for oil prices to fall is limited during the year, and high oil prices are still the norm.

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