Crude Oil Prices Are Up 56% This Year; Covid Omicron variant, demand is worried, others will impact rates in 2022

Crude oil appears to be heading towards Rs.6500-6000 per barrel initially, while a sustained move above the same area could encourage further buying interest towards the next territory at Rs.7500 per barrel or 110 $ per barrel for the year.

Through Sugandha sachdeva

There has been no turning back for crude oil since prices briefly dipped below $ 0 in the spring of 2020. The energy meter has made a strong comeback since then and has maintained a strong recovery in 2021. Since the very start of the year, there has been a relentless upward movement with few pauses in between, where prices hit their highest levels since 2014. A shift from extreme pessimism to vibrant optimism can be attributed to a rebound in demand as the global economy began to recover from the pandemic-induced abyss due to the vaccine roll-off, where industrial activity resumed and easing travel restrictions lifted fuel consumption. Additionally, OPEC and its allies continued their record production cuts of 9.7 mbpd since mid-2020, to eliminate the supply glut that has anchored prices on an upward journey. Saudi Arabia even added 1 mbpd of voluntary production cuts from February to March to support prices.

At the end of the year, however, the oil cartel changed direction and decided to gradually withdraw production cuts, against the backdrop of a recovery in demand. However, the bottlenecks linked to hurricanes Ida and Nicholas, low stocks and finally the energy crisis that is hitting parts of Europe and Asia, with the soaring prices of coal and natural gas, have led to a strong demand for substitutes and a sharp increase in oil prices. Despite pressure from some heavy consumers to pump more oil, OPEC + has stuck to its plans to gradually increase supply. This pushed prices on a bullish path as supply was unable to meet rapidly increasing demand resulting in a tightening of the market. In addition, US production was unable to offset OPEC + supply cuts and fell short of the record 12.3 mbd set in 2019, due to storm-related disruptions and under- investment in the sector.

However, towards the end of the year, prices fell from their multi-year highs as some Western majors joined with some Asian powers in tackling high oil prices and agreed to release oil from their strategic reserves. Additionally, speculative interest fell as market participants unwound long trades to lock in splendid gains. Demand concerns have resurfaced following the emergence of the new Omicron Covid variant and prices have fallen from multi-year highs. Nonetheless, as we close 2021, crude oil prices closed with remarkable gains of around 56%.

As we move into 2022, it looks like prices will initially ease as there are a lot of uncertainties arising from the fast-spreading Omicron variant. While supply is expected to see an increase from major producers, demand concerns would keep prices in check amid the fragility emanating from the threat of Covid. The OPEC + alliance plans to stick with its current policy of restoring monthly production to 400,000 bpd, although it remains to be seen how it will respond to recent demand risks associated with the reimposition of lockdowns in the country. certain countries. In addition, the non-OPEC supply is expected to increase by 3 mbd next year. According to the EIA, US production is expected to average 11.9 mbpd in 2022. Drilling activity in the United States resumes, where the total number of rigs rose to 586 in the week leading up to December 23, 2021, up nearly 68% from during the same period of 2020. This trend could intensify at a time when global oil demand growth is expected to slow, leading to a supply situation surplus in the oil markets in the first quarter of 2022. Even more, as major central banks prepare to tighten monetary policy amid mounting inflationary pressures, this will hurt feelings of risk in the markets and act like another wind opposite for oil prices.

Highlighting the short-term triggers, things on the whole are still taking shape. Statistics suggest that the outlook for global oil demand is optimistic, with industrial consumption having already surpassed 2019 levels, even though demand for aviation jet fuel is still hovering 15-20% below 2019 levels. As demand from major oil consumers such as China, the United States and India approaches pre-pandemic levels as economies recover rapidly, the EIA and OPEC expect what the world is following suit and global consumption is expected to exceed 100 mbpd by the end of 2022. For the coming year, oil demand in OECD countries is expected to increase by 1.8 mbpd, while in the non-OECD region, it is expected to increase by 2.3 mbpd, thanks to improved demand prospects, especially in Asia. Although the pandemic is protracted, the world is better prepared to face the related challenges, amid progress in immunizing increasing shares of the population, and Omicron is expected to have a moderate impact on global oil demand compared to previous waves. . OPEC + would also continue to adjust its supply policy according to the evolving demand scenario which will support prices to a large extent.

Deciphering the dynamics that will drive oil prices in 2022, the energy meter appears to be witnessing profit realization in the first few months, where it could find a solid base around 4,000 to 3,600 rupees per barrel (55 at $ 50 per barrel for WTI crude). In the process, a recovery could be observed from the second half of the year, when the phase of intermediate correction seems to mark a change and oil prices will resume their trajectory northward. Crude oil appears to be heading towards Rs.6500-6000 per barrel initially, while a sustained move above the same area could encourage further buying interest towards the next territory at Rs.7500 per barrel or 110 $ per barrel for the year.

(Sugandha Sachdeva is Vice President of Commodities and Currency Research, Religare Broking. The views expressed are those of the author.)

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Felix J. Dixon