What will happen to oil prices in 2022? – RealnoeVremya.com
Multi-vector factors affect the quotes. It’s a big question what will prevail
Global oil demand will return to pre-pandemic levels a year from now, said Leonid Fedun, vice president of strategic development at Lukoil. Artur Safiulin, columnist for Realnoe Vremya, an economist with many years of banking experience, shares his vision on the development of the situation in the oil market in 2022. In the column of our publication, he analyzes the conclusions of analysts that the prices will stay above $ 60 a barrel and write about the market outlook.
Impact of the pandemic
During the lockdown period in early 2020, demand for oil collapsed – flights, cruises, transport, trips to work stopped. The subsequent increase in the supply of crude oil and the lack of places to store it led to the fact that in April of last year, oil futures contracts generally moved into negative territory.
At the height of the oil market collapse, sellers of WTI contracts themselves paid buyers $ 37 a barrel. This situation has forced manufacturers to drastically reduce their production.
The faster-than-expected recovery of world economies led to the opposite situation: demand began to exceed supply. As a result, oil prices not only rose, but also exceeded levels that existed before the pandemic.
What is happening in the global market
Since the start of the year, Brent crude has risen 52%. Experts expect the market to remain balanced in 2022. The recent US decision to use 50 million barrels of strategic reserves will not affect prices in any way, since this volume represents only 0.15% of the annual offer.
It is no secret that the oil supply market is governed by the OPEC + association, which determines the level of production of all major suppliers and sets itself the task of preventing a sharp drop in the price of oil. barrel. It is, in fact, a cartel that few people in the world are happy with. There is constant pressure on the organization – the United States would like consortium members to agree on the pace of supply increasing at a higher rate. The world economy needs cheaper oil, it’s no wonder here. But following the meeting in early December, the alliance once again confirmed its official position: production will increase at the previously agreed rate. On November 4, it was decided to increase production by 400,000 barrels per day in December. The next meeting is scheduled for January 4, and according to experts, one should not expect any changes in the amount of production.
Traditionally, in January, there is a seasonal weakening in demand for petroleum and petroleum products. The spread of the new strain of coronavirus is also adding to weak demand, which can lead to further lockdowns and, as a result, lower demand for oil. All of these factors make the likelihood of an increase in OPEC + production minimal. As the UAE Minister of Energy noted in the first quarter of 2022, a surplus in the market is expected and a further increase in supply under these conditions does not make sense. In addition, the release of inventory volumes by several countries will ease tensions at the start of the year. A cut in production is also unlikely, as the alliance will only take such steps with a sharp drop in prices – down to $ 50-55 per barrel.
Of course, prices can go up and down. It all depends on a combination of factors at one time or another.
The growth forecast is supported by this, despite the excess oil expected in the first quarter of 2022 (due to the opening of reserves in a number of countries), the low level of reserves among producers precludes the possibility of a sharp drop in prices. In addition, high inflation around the world will support the cost of raw materials. Further unpacking of oil reserves will depend on price dynamics and OPEC + decisions. The decision not to increase production and a price increase of more than $ 80 per barrel will result in additional sales from strategic reserves. The consensus opinion remains that the price level will stabilize at $ 60-65 per barrel, as Leonid Fedun notes.
Serious factors will hamper further price growth. First of all, this is an increase in production, because in 2021 there was a significant increase in drilling activity around the world, and in January-February of next year the market will go from deficit to surplus. This does not take into account the very “unwrapped” volumes of state reserves. Second, due to the tightening of monetary policy in the United States, the dollar will also strengthen. Together, these two factors will exert negative pressure on quotes.
There is a view that quotes will drop rapidly due to oversupply in the market, to levels of $ 45 per barrel. After all, in addition to OPEC +, there are a number of producers who are actively increasing their production (US, Canada, Brazil and others). According to proponents of this forecast, in the first half of next year, market sentiment will be determined by supply growth, which will far outweigh the strengthening demand. In 2021, global demand increased by 5.1 million barrels per day. According to forecasts, in 2022 the increase will be only 3.6 million barrels. Supply, on the contrary, will show rapid growth – from 1.8 million barrels per day in 2021 to 5.3 million barrels in 2022. OPEC + must monitor its production very closely in the first half of the year. next, as they seem to have reached overproduction, and it may help to reduce production. The low price of oil poses additional risks to the global economy.
“The risk of falling prices comes from the possible emergence of new strains of coronavirus”
In conclusion, I would like to note that the consensus forecast for oil prices is at the level of $ 60-70 per barrel. This level is suitable for both producers and consumers. Analysts estimate that global demand in 2022 will be higher than before the pandemic, and global reserves have been found to be 5% below the five-year average (but that figure is declining rapidly due to the production activity of all players of the market).
In general, the risk of price increases can be created by a low level of oil reserves, the restoration of the volume of air traffic, a low level of available production capacities. The risk of falling prices comes from the possible appearance of new strains of coronavirus (and new lockdowns, as a result), the use of strategic reserves by a number of countries, the weakening of the sanctions regime against Iran (only this country can lower prices, returning to its usual level of production). It will be interesting to observe at what level the oil market will find its equilibrium. There are many different vector factors, and the results can be diametrically opposed.
The author’s opinion may not coincide with the position of the editorial board of Realnoe Vremya.