The international crude oil benchmark Brent is set to drop to $70 per barrel on the back of an expected oversupply of oil in the first quarter of 2022, Commerzbank said on Wednesday.
Brent Crude traded at $72.72 per barrel early on Wednesday, down by 1.33%, as traders are still assessing the potential impact of Omicron on global oil demand amid mounting signs that an oversupply on the market is imminent.
The prompt Brent Crude spread traded briefly on Tuesday at a contango – the market structure in which front-month prices are lower than prices out in the future months, signaling an oversupply. The prompt spread in the Brent futures contract flipped on Tuesday from backwardation to contango for the first time since March 2020, excluding the days on which contracts expire.
All analysts and estimates expect the oil market balance to start shifting to oversupply as soon as this month and see supply exceeding demand in the first quarter of 2022.
In its monthly report on Tuesday, the International Energy Agency (IEA) said that global oil production was set to outpace demand in December, led by growth in the U.S. and OPEC+ countries.
“Much needed relief for tight markets is on the way, with world oil supply set to overtake demand starting this month,” the IEA noted. Related: Middle East Stock Markets Are Set To Soar In 2022
If OPEC+ continues to unwind its cuts, the first quarter of 2022 will see a surplus of 1.7 million bpd, and the oversupply could grow to 2 million bpd in the second quarter of 2022, according to the agency.
“If that were to happen, 2022 could indeed shape up to be more comfortable,” the IEA said.
The agency thinks that the surge in COVID cases is set to temporarily slow the recovery in global oil demand, but the impact of the Omicron variant will likely be more muted than previous waves and will not upend the current demand recovery. The IEA revised down slightly—by 100,000 barrels per day (bpd)—its demand growth forecast for both this year and next. In 2021, the IEA expects oil demand to rise by 5.4 million bpd compared to 2020, and another 3.3 million bpd in 2022, reaching the pre-COVID levels of 99.5 million bpd.
By Tsvetana Paraskova for Oilprice.com
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