Xinhua (China): how to treat low oil prices on the international market?

In may, global oil prices have recovered but are still at a low level. How to treat low oil prices?

Since March this year, the global imbalance between supply and demand of oil superimposed on the implications of the new epidemic coronavirus pneumonia. World oil prices continue to remain low. 20 April futures on light crude oil on the new York stock exchange for delivery in may has demonstrated a rare situation of “negative prices”. Thanks to the agreement on the reduction of oil production, international oil prices in may rebounded slightly, but the problem with the imbalance of supply and demand for crude oil yet to be resolved.

Will global oil prices continue to fall? The impact of low oil prices on China’s economic performance? Our reporter interviewed several experts.

Since March of this year, world oil prices show a tendency to fall. Although in may the price of oil recovered, they are still at a low level. April 20, may futures for light oil on the new York Mercantile exchange closed at -37,63 dollars per barrel, fell by more than 300%. For the first time since 1983, when on the new York stock exchange began trading oil futures, they dropped to negative values.

The oil is called “industrial blood”, and the prices are considered as a “thermometer” of the world economy. Whether the current drop in prices a short-term impact, or it will continue in the long term? The impact of low price on China’s economy: positive or negative? How China should deal with the impact of these low prices?

World oil prices will continue to decline

“New coronavirus pandemic has had the greatest impact on the global energy system over the past 70 years.” The international energy Agency (IEA) recently published “Global energy assessment”, which States that this year global demand for energy will decrease by 6%.

The immediate cause of the recent drop in crude oil prices is the fact that a new epidemic coronavirus pneumonia led to a sharp decline in global demand. Emerald Suchen, researcher at the National Institute of external openness of foreign economy and trade and Professor at the College of international trade and Economics, noted that after March, the epidemic has spread in many countries, enterprises stopped work and production, the number of homebound citizens was reduced, which caused a global decline in demand for crude oil. In addition, storage tanks at an early stage was almost completely filled.

Lin Botsyan, Dean of the Chinese research Institute of energy policy, University of Xiamen, said that the underlying reason for the sharp fall in oil prices was the imbalance in the structure of the world oil supply and demand. In recent years, thanks to major technological breakthroughs, the industry of shale oil in the United States received the rapid development, capturing the space for production cuts by OPEC and Russia, which in the global power structure has changed.

For this reason, countries-the oil exporters and the OPEC countries are not members of that organization, did not want to cut production early this year. In the international market of crude oil turned price wars, precipitating a sharp fall in oil prices. In the end both parties came to an agreement to reduce oil production and average daily production decline in may was 9.7 million barrels, which was the lowest level in the history of all agreements of production cuts by OPEC.

Lin Botsyan believes that improvement suggestions actually led to increase in oil prices in may, but the problem of global imbalances between supply and demand for crude oil is still difficult to solve.

Emerald Suchen said that the promotion of alternative sources of energy has led some countries even to develop a schedule of withdrawal of vehicles for transportation of fuels and demand from developing countries is gradually slowing. These changes on the demand side will lead to the fact that in a few years the consumption of oil shows a peak value and then begins to decline.

“Currently, production cuts by OPEC leads to an increase in oil prices, but it is more likely that in the future oil prices remain in the range of 30 to 50 U.S. dollars per barrel,” said brown Suchen.

From this point of view I agree those who are directly involved with the oil industry. Chenyue fu, the former Chairman of China national petroleum and chemical Corporation recently announced that oil prices will continue to fluctuate over the next one to three years, keeping the level below $ 50 per barrel, which may be lower than the cost of production in many oil-producing countries.

Fluctuations in oil prices at a low level of impact on oil and gas production

China is a net importer of oil, and its dependence on foreign oil made up of 70.8%. Data show that in 2019 the total import volume of China amounted to 2.07 trillion dollars, of which oil imports amounted to 240,4 billion for 3.7 billion barrels and the average price of imported oil was of 64.97 per barrel.

“The fall in oil prices may balance of international payments and to reduce foreign currency expenditure of China,” brown Suchan believes that if the price of crude oil stabiliziruemost at 35 dollars per barrel this year, while imports will be the same as last year, China will save 110 billion dollars in spending, and future decline in oil prices will reduce economic, social and operational costs.

The dynamics of oil prices is also having a big impact on the prices of other energy sources and industries. Since the beginning of this year, natural gas prices in the international market decline. The international energy Agency published a report which says that demand for natural gas will decrease by 5% in 2020, and this would be the largest decline in gas consumption in one year after the international expansion of its development.

The price of coal has also dropped significantly. Some foreign organizations believe that in the short term there are no signs of increasing demand in the global coal market, and the likelihood of recovery is small.

According to the latest data released by the National Bureau of statistics, the consumer price index (CPI) in China rose in April by 3.3% compared to the same period last year, while the producer price index of industrial goods (PPI) decreased by 3.1%. Among them, the decline in PPI is strongly influenced by the drop in the price of crude oil.

Emerald Suchen said that the fall in oil prices is beneficial for transport and other sectors, but does not help the oil and gas industry, especially exploration and production of oil and gas. Since the cost of exploration and development of oil and gas in China is higher than current oil prices, the cost of crude oil production with a certain scale would be about $ 50 per barrel, and low oil prices will have a big impact on the extraction of oil and gas.

Relevant experts say that no matter how low will be the international price of oil, supply of oil and gas from China may not be completely focused on the purchase on the international market. It is necessary to maintain the basic stability of exploration and development of oil and gas in the country, to avoid fluctuations in the production of energy resources within China, because it affects the stable operation of the economy. In addition, with regard to renewable energy, the decline in oil prices has led to the fact that they started to lose efficiency, which they soon will face a severe test of the market.

Will pays special attention to how to respond to fluctuations in oil prices

“China should pay close attention to the influence of changes in oil prices on the financial sector and make a good plan.” Emerald Suchan noted that oil prices are closely related with the financial market. In the United States, development of shale oil and gas is closely connected with the financial market: the fall in oil prices some of the us shale oil company went bankrupt.

Lin Botsyan believes that the period of low oil prices is a favorable time to increase strategic oil reserves, but the real problem is the shortage of oil storage facilities and infrastructures. Being a large country with a high dependence on foreign oil, it is possible to consider the inclusion of storage tanks in the construction of infrastructure to increase the capabilities of China’s strategic oil reserves.

Emerald Suchen proposed to continue the improvement of the system of storage tanks and storage engine oil, as well as to consider the establishment of private enterprises and the construction of private oil tanks.

For several large oil companies decrease costs and increase efficiency has become an inevitable choice to combat the global decline in oil prices. Wang dongjin, President of China national offshore oil Corporation, said that this year he will fully contribute to cost control. On the basis of a 9% reduction of the total cost of a barrel of oil in 2019, should make further efforts to reduce the cost of a barrel of oil and reduce total costs by at least 10%. We must make all efforts to eliminate the negative impacts of low oil prices on production activities.