By Sugandha Sachdeva
There has been no looking back for crude oil since prices plunged briefly below $0 in spring 2020. The energy counter has made a strong comeback since then and sustained a robust rally in 2021. From the very beginning of the year, there has been an unrelenting up move with little 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 roll-out of vaccines, where industrial activities picked up and easing travel restrictions lifted the fuel consumption. Also, OPEC and allies continued with their record production cuts of 9.7 mbpd since mid-2020, to clear the supply glut which anchored the prices on an uphill journey. Saudi Arabia even added 1mbpd of voluntary output cuts from February through March to prop up the prices.
In the later part of the year, the oil cartel however changed its stance and decided to gradually withdraw output cuts, against the backdrop of revival in demand. However, supply bottlenecks amid Hurricanes Ida and Nicholas, low inventories, and finally the energy crunch gripping parts of Europe and Asia, with soaring coal and natural gas prices led to a lot of substitute demand and a steep rise in oil prices. Despite the pressure from some large consumers to pump more oil, OPEC+ stuck to their plans to raise supply gradually. This pushed prices on the upwards trajectory as supply was not able to match the rapidly rising demand, leading to tightening of the market. Besides, the U.S. production was not able to compensate for OPEC+ supply cutbacks and remained far from the 12.3 mbpd record set in 2019, owing to storm-related disruptions and under-investment in the sector.
However, towards the end of the year, prices slipped from their multi-year highs as some western majors joined hands with some Asian powers to combat high oil prices and agreed to release oil from their strategic reserves. Also, speculative interest registered a fall as market participants unwound long trades to lock splendid gains. Demand concerns resurfaced prompted by the emergence of the new Omicron Covid variant and prices eased off from multi-year highs. Nonetheless, as we wrap up the year 2021, crude oil prices closed with remarkable gains of around 56 percent.
As we step into 2022, it seems prices will soften initially as there is a lot of uncertainty stemming from the fast-spreading Omicron variant. While supply is anticipated to witness a rise from the major producers, demand worries would keep prices under check amidst the fragility emanating from the Covid threat. OPEC+ alliance plans to stick to their existing policy of restoring monthly output by 400,000 bpd, though it remains to be seen how they react to the recent risks to demand from re-imposition of lockdown measures in certain countries. Also, non-OPEC supply is likely to grow by 3 mbpd next year. As per the EIA, US production is expected to average 11.9 mbpd in 2022. Drilling activity in the United States is picking up, where the total rig count rose to 586 in the week to Dec 23, 2021, up almost 68% as compared to the same period of 2020. This trend might intensify at a time when global oil demand growth is expected to slow down, leading to an oversupply situation in oil markets during Q1 2022. More so, as the major central banks gear up to tighten monetary policy due to rising inflationary pressures, it will hurt risk sentiments in the markets and would act as another headwind for oil prices.
Underscoring the near-term triggers, overall things are still taking good shape. Stats suggest that the global oil demand outlook is upbeat, where industrial consumption has already surpassed 2019 levels, even as jet fuel demand for aviation is still hovering 15-20% below 2019 levels. While demand in the major oil consumers such as China, the U.S., and India is close to pre-pandemic levels as economies recover swiftly, the EIA and OPEC expect the world to follow suit and global consumption is forecast to exceed the 100 mbpd mark by end of 2022. For the year ahead, demand for oil in OECD countries is expected to rise by 1.8mbpd, while in the non-OECD region it is forecasted to surge by 2.3mbpd, aided by improved demand prospects, particularly in Asia. Though the pandemic drags on, the world is more prepared to deal with the related challenges, amid strides being made in vaccinating growing shares of the population, and Omicron is projected to have a mild impact on the global oil demand as compared to the previous waves. OPEC+ would also continue adjusting its supply policy based on the evolving demand scenario that shall underpin prices to a large extent.
Decoding the dynamics that will steer oil prices in 2022, the energy counter looks to witness profit booking in the initial months, where it could find a firm base around Rs.4000-3600 per bbl levels ($55-50 per bbl for WTI crude). Moving ahead, recovery could be witnessed from H2 onwards, where the intermediate correction phase seems to mark a shift and oil prices shall resume northwards path. Crude oil seems to traverse towards Rs.6500-6000 per bbl level initially, whereas a sustained move above the same zone could encourage further buying interest towards the next territory at the Rs.7500 per bbl or $110 per bbl mark for the year.
(Sugandha Sachdeva is VP- Commodity & Currency Research, Religare Broking. Views expressed are the author’s own.)