Oil demand took a big hit last year when the coronavirus initially ignored in China spread around the world and started causing lockdowns. Then the wave subsided and oil demand started to rebound, much faster than expected. Despite the green transition push, demand will also continue to pick up next year and beyond. Many forecasters, including BP, argued in 2020 that peak oil had already passed and we should expect a more renewable energy mix. And then the number of Covid-19 cases in key markets started to drop and the demand for oil started to rise. Since then, demand has rebounded so strongly that it has led forecasts to start warning of the possibility of a shortage.
Saudi Arabia recently warned that underinvestment in new oil and gas production would lead to higher prices and supply shortages.
“We are heading into a phase that could be dangerous if there is not enough energy spending,” the Kingdom’s energy minister, Prince Abdulaziz bin Salman, said earlier this month. Insufficient investment could lead to an “energy crisis”, he added.
Banks are contributing to the gap between demand forecasts and supply realities as they feel growing pressure to stop doing business with the oil and gas industry because of its carbon footprint. This could well exacerbate the energy crisis if such a crisis is indeed in the cards.
It probably is. Investment banking analysts seem to be expecting massively higher prices due to strong demand and not so strong supply. Damien Courvalin of Goldman Sachs mentioned earlier this month Crude Brent could reach $100 next year. Morgan Stanley analysts slashed its first-quarter 2022 oil outlook, citing omicron’s concerns, but raised its third-quarter forecast to $90 a barrel for Brent from $85 a barrel.
BMO Markets Canada waits oil demand will hit a record high next year and will remain strong for the next few years as well despite a temporary decline in the first quarter, again due to the omicron variant of the coronavirus.
Speaking of omicron, OPEC has largely swept away what others see as a new threat to global economies and oil demand. The cartel, in its latest monthly oil market report, actually raised its demand forecast for the first quarter of next year, despite planned reserve releases from the United States, Japan and South Korea. , aimed at curbing the rise in oil prices that began in late 2020 and pushed benchmarks to highs above $80 a barrel in October.
According to the cartel, omicron’s effect on oil demand will be “mild and short-lived as the world becomes better equipped to handle COVID-19 and its related challenges.”
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Goldman’s Courvalin seems to agree with this view. “If this is another wave like the ones we’ve seen before, then it’s a negative blow to economic growth in the first quarter of 2022,” he said recently, as cited by Reuters. “But if there is a subsequent recovery, oil demand, which briefly touched pre-COVID levels in early November, would then be at new highs for most of 2022.”
If previous waves of Covid-19 are any indication, there will also be a recovery after this wave. A potential problem would be the ability of suppliers to satisfy this demand beyond the short term. Investment in new oil production has indeed declined significantly, and many industry players – mainly the supermajors – are still hesitant to splash more oil and gas, so they are splashing on renewable energy capacity instead.
It can play a bad joke on them down the road, though. If Europe’s energy crisis has taught us anything, it’s the unpleasant fact that even a green and sustainable Europe is still heavily dependent on fossil fuels. And Europe is not among the first consumers of oil, it is emerging Asia that has this pleasure, and all forecasts point to this growing demand in the years to come.
OPEC+ spare capacity stood at 5.11 million bpd in October this year, according to to the United States Energy Information Administration. However, spare capacity is not static, and the October figure is actually a substantial drop from early 2021, when spare capacity in the extended cartel was 9 million bpd. And it could drop further to less than 4 million bpd by the end of next year.
This state of affairs has prompted the International Energy Agency, a strong advocate of the energy transition, to call for more investment in new oil production. How serious the situation could become due to this discrepancy can be seen in the fact that a few months earlier the IEA had called for an end to all new oil and gas investment so that the world could achieve its goals. from net zero.
So it looks like next year will see even stronger demand for oil, even with a temporary dip in the first quarter while we accept the omicron variant. And while demand strengthens, supply growth will continue to lag under pressure from ESG investors and the government. Oil markets are certainly in for an interesting year in 2022.
By Irina Slav for Oilprice.com
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