International oil prices exceeded US$50 per barrel for the first time since October last year.
Now it seems it’s time to change our previous expectations for oil prices.
At that time, I predicted that US$50 per barrel would become the level at which international oil prices would hover for a long time and would be a ceiling for oil prices.
When the international oil price is still above US$60 per barrel, almost everyone believes that US$50 per barrel will be the low point at which crude oil begins to rebound.
After all, at that time, everyone was expecting international oil prices to rise to more than $75 per barrel.
Both Saudi Arabia and Russia need oil prices near $100 to balance their budgets.
Oil prices below $50 a barrel are considered unsustainable because they would drive U.S. shale oil companies out of the crude oil market.
In the first half of last year, international oil prices have been hovering between US$50 per barrel and US$70 per barrel. In August 2015, international oil prices fell below US$50 per barrel, when countries led by the United States lifted economic sanctions against Iran.
, which means that Iran has returned to the international crude oil market, and the supply of crude oil market has increased significantly.
Since then, oil prices of US$50 per barrel have been the ceiling for international oil prices.
But now that international oil prices have risen above US$50 per barrel, will US$50 become the floor of international oil prices? Many investors hope that US$50 will be the floor of oil prices.
Hedge funds and some speculators have begun to be significantly long in crude oil futures. Currently, the number of main long crude oil futures contracts on the New York Futures Exchange has reached 555,000, setting a record high.
The previous record high was 548,000 contracts in 2014, before international oil prices reached $120 a barrel.
Speculative enthusiasm and inflation are a reliable precursor to another market slump.
More importantly, from the perspective of economic fundamentals, US$50 per barrel is the ceiling, not the floor, of international oil prices.
This situation is somewhat similar to January 2015. The current international crude oil market is no longer controlled by the oil monopoly organization OPEC.
The main reasons are as follows: 1) The emergence of new crude oil supply sources; 2) The progress of energy technology; 3) The restrictions of the international environment; 4) Like other commodities, the current oil price is formed under a variety of competition mechanisms.
This situation occurred within 20 years from 1985 to 2004. In the past 18 months, the performance of the crude oil spot market shows that the oil price was formed first before the competition mechanism.
Therefore, in the crude oil futures market, the price of crude oil for delivery in 2020 has dropped to US$56 per barrel from the US$75 per barrel expected a year ago.
It can be said that the current international oil price is formed by the competition mechanism.
If this competition mechanism can continue, then oil-producing countries will not be able to determine international oil prices according to their own needs and wishes.
Both Saudi Arabia and Russia very much hope that international oil prices can reach US$70 to US$80 per barrel in order to balance their budgets.
Although oil-producing countries want crude oil prices to reach that level, it does not mean that they can achieve that goal.
In addition, iron ore producers and copper companies cannot arbitrarily determine the prices of iron ore and copper in order to meet shareholders' profit expectations.
If international oil prices remain below $50 per barrel and there is no hope of rebound, those heavily indebted shale oil companies will declare bankruptcy.
The assets of these shale oil companies were either taken away by banks or bought by other companies with more abundant funds.
After a shale oil company is acquired, it will continue to produce oil according to the acquirer's requirements.
It is obvious that changes in the pricing mechanism of crude oil prices dominate the price formation of the crude oil market, which will also determine that crude oil prices will be around US$50 per barrel.
This situation occurred when OPEC countries did not reach a unanimous oil production agreement on April 17.
The meeting also failed to convince the governments of Saudi Arabia, Russia and Iran to coordinate production cuts.
Now almost all major oil-producing countries have clearly admitted that no matter how low the international oil price is or how serious the oversupply of crude oil in the international market is, they will further expand oil production.
Like commodity markets such as iron ore, competition in the crude oil market is also fierce.
Many textbooks assume that prices are determined by the marginal cost of the last provider.
From now on, oil producers should set themselves an upper and lower marginal cost line.
At present, the cost of oil production in Saudi Arabia, Iraq, Iran and Russia is relatively low, but as long as the international oil price is above US$25 per barrel, these countries will fully produce oil.
2. U.S. shale oil and Canadian oil companies will only significantly increase oil production after the national oil price exceeds US$50 per barrel. However, the actual situation is that oil prices will not rise much above US$50 in the near future.
It is still impossible to predict the supply and demand of crude oil, so the crude oil market will remain volatile.
From 1985 to 2004, international oil prices were formed in competition. At that time, international oil prices could more than double or fall by more than 50% within a few months.
Therefore, it is not impossible for international oil prices to fall to around US$28 per barrel again.