As we kick off the new year, the race is on to predict the course that the oil market will take in 2022. The bulls and the bears are predicting two extremely divergent paths for what all agree is going to be a tumultuous year for Big Oil. One vision predicts that supply will recover as production returns to business as usual, and oil demand steadies or decreases. In this scenario, we can look forward to stabilized oil prices. The other vision is that demand growth will keep on keeping on as stockpiles remain low.
On Tuesday, the US Energy Information Administration (EIA) increased its oil price outlook by a considerable $5 per barrel. However, true to the tumultuous shape the year is already taking, the EIA “sees those levels falling throughout the year as global supply outpaces demand as soon as the second quarter” according to reporting from energy information and analytics company S&P Global Platts.
In the long term, however, the EIA is expecting oil demand to keep growing, even as the global push for decarbonization continues to gain traction amidst increasingly urgent calls from global leaders and environmentalists. “The EIA expects global oil demand to increase 3.62 million [barrels a day] year on year in 2022, up 70,000 [barrels a day] from last month's Short-Term Energy Outlook.” If this projection comes to pass, global oil demand would finally top 2019 levels for the first time since the pandemic began in the early months of 2020, topping those numbers by approximately 260,000 barrels a day.
OPEC’s expectations for the 2022 oil market is even more optimistic (from an oil cartel’s point of view, not so much the aforementioned environmentalists). Their base case sees global oil demand topping pre-pandemic highs to the tune of 101 million barrels a day, and even surpassing 103 million barrels a day in December of this year. Projections and predictions, however, are purely hypothetical at the end of the day – and the volatility of global economics and geopolitics can and undoubtedly will throw a wrench or 20 into the works.
Those who are predicting a weak oil market point to surplus oil supplies, in the wake of increased production rates on the heels of this winter’s pleas for increased pumping to combat the energy crunch hitting Asia and Europe in devastating waves. A recent opinion column from Bloomberg, however, takes issue with projections of a weak oil market in 2022, because this outlook “assumes that the 19 members of the OPEC+ group who have output targets will actually pump at those rates. But they aren’t, and many of them can’t.” In fact, OPEC has fallen short of its production market for seven consecutive months. Last month, it missed its collective target by 625,000 barrels a day.
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“That gap’s not going to close any time soon,” the Bloomberg article contends. “In fact, the deficit won’t ever be recouped unless those in the group with spare capacity are allowed to make up the production shortfalls of those without. This seems unlikely.” This assertion is likely hyperbolic, especially on any kind of extended guidelines, considering the very real push for the development of cleaner and renewable energy resources worldwide.
To be sure, the world continues to rely on fossil fuels for its most basic functions, and demand will inevitably continue to grow at a rapid clip in developing countries. However, there is a concerted sea change taking place in energy markets, and the dominance of fossil fuels will not remain unchallenged. In 2022, however, oil demand is set to keep expanding, and oil prices are likely going to keep soaring right along with it.
By Haley Zaremba for Oilprice.com
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My rationale is based on the fact that so many powerful bulls have joined hands for the first time since 2014 to accelerate global oil demand. Among these bulls are a roaring economy, a tight market, a shortage of enough global investments in oil and gas, a steep decline in global concerns from the Omicron variant and rising geopolitical tensions in the Gulf region and over the Ukraine.
And to top all the above factors, there are clear indications that oil prices are now in a supercycle which is defined as a sustained expansion usually driven by robust growth in demand. This means that crude oil prices are projected to continue surging at least for the next five years which could take the Brent crude price to $110-$120 a barrel.
OPEC+ is even more optimistic about 2022 with expectations that oil demand will not only surpass the 2019 level of 101 million barrels a day (mbd) but it could even hit 103 mbd.
The quintessential question is can OPEC+ add to its current spare capacity to help balance the market in 2022. I believe it can to some extent with help from Saudi Arabia, Russia, UAE, Kuwait and Iraq but I doubt whether it can generate a spare capacity big enough to stem the continued surge of oil prices in the next few years.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London