Strong recovery of the oil service industry


Since October, the price of crude oil has mainly risen. Especially in the first week of October, the price of light crude oil in the United States rose 16.48%, and the price of Brent crude oil rose 15.05%, the biggest weekly increase in seven months. On October 17, American light crude oil futures in November closed at 85.46 dollars/barrel, while Brent crude oil futures in December closed at 91.62 dollars/barrel, up 7.51% and 4.16% respectively in half a month. Affected by the rise in oil prices and the acceleration of construction of domestic related industrial projects, the oil service industry is experiencing a strong recovery.

From the perspective of the international crude oil market, on October 5 local time, OPEC+held a ministerial meeting and announced a significant reduction of 2 million barrels/day from November. This production reduction was very large, the largest since the COVID-19 in 2020, accounting for 2% of the global total demand. Affected by this, the price of light crude oil in the United States rebounded rapidly, rising by 22% in just nine trading days.

Against this background, the US government said that it would release another 10 million barrels of crude oil reserves to the market in November to cool the crude oil market. However, OPEC+, led by Saudi Arabia, has hard oil resources and strives to safeguard its own interests. At present, the average deficit line of oil producing countries in the Middle East is about 80 dollars/barrel, and it is unlikely that the short-term oil price will fall sharply.

According to the report released by Morgan Stanley, with the substantial production reduction of OPEC+and the EU’s oil embargo on Russia, Morgan Stanley raised the forecast price of Brent crude oil in the first quarter of 2023 from 95 dollars/barrel to 100 dollars/barrel.

In the context of high oil prices, the acceleration of the construction of related industrial projects in China will also accelerate the development of the oil service industry.

On September 28, the key project of the national “Fourteenth Five Year Plan” oil and gas development plan — the fourth line of West East Gas Pipeline Project was officially started. The project starts from Yierkeshtan, Wuqia County, Xinjiang, passes through Lunnan and Turpan to Zhongwei, Ningxia, with a total length of 3340 kilometers.

In addition, the state will speed up the construction of oil and gas pipeline network projects. Song Wen, Deputy Director of the Planning Department of the National Energy Administration, recently publicly stated that the scale of the national oil and gas pipeline network will reach about 210000 kilometers by 2025. It is estimated that the investment in key energy fields during the “14th Five Year Plan” period will increase by more than 20% compared with the “13th Five Year Plan” period. The implementation of these new projects will drive the continuous growth of demand for oil equipment.

In addition, domestic energy enterprises also plan to enhance domestic oil and gas exploration and development efforts. Data shows that in 2022, the capital planned expenditure of China’s oil exploration and production sector will be 181.2 billion yuan, accounting for 74.88%; Sinopec’s planned capital expenditure for petroleum exploration and production sector was 81.5 billion yuan, accounting for 41.2%; CNOOC’s planned capital expenditure for oil exploration and production is more than 72 billion yuan, accounting for about 80%.

For a long time, the trend of international oil prices has greatly affected the capital expenditure plans of oil companies. When oil prices are high, upstream enterprises tend to increase capital expenditure to produce more crude oil; When oil prices fall, upstream enterprises will reduce capital expenditure to cope with the cold winter of the industry. This also determines that the oil service industry is an industry with a long cycle.

Xie Nan, an analyst of Zhongtai Securities, pointed out in the research report that the impact of oil price changes on the performance of oil services has a transmission process, following the principle of “oil price – oil and gas company performance – oil and gas capital expenditure – oil service order – oil service performance”. The oil service performance reflects a lagging indicator. In 2021, although the international oil price will rise, the recovery of the oil service market will be relatively slow. In 2022, the demand for refined oil will recover, the international oil price will rise all the way, the global energy price will remain at a high position, the domestic and foreign oil and gas exploration activities will become increasingly active, and a new round of boom cycle of the oil service industry has begun.

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Post time: Nov-03-2022