In 2021, the oil market will recover significantly in both supply and demand. Due to the gradual reopening of the global economy after the new crown pneumonia epidemic, the vaccination process has increased mobility. At the same time, the shortage of natural gas has increased the demand for crude oil as an alternative. As of Thursday (December 23), the price of Brent crude oil futures has risen by more than 50% this year, rising from US$48.4/barrel to US$85.41/barrel, a 7-year high. Looking ahead to 2022, although the oil market supply and demand is expected to continue to pick up, the following five factors still bring volatility risks to the oil market.
Weather conditions: the recurrence of extreme cold waves may push up energy prices
If there are extreme cold weather like last winter in the first quarter of this year, oil prices may reach 100 US dollars per barrel or even higher.
In February 2021, a severe winter caused severe damage in parts of the southern United States, resulting in at least 24 deaths and hundreds of thousands of power outages. The sudden surge in demand has exacerbated supply shortages.
Ana Azuara, Economic Analysis Manager of Grupo Financiero Base, commented: “In the next year, although the price of West Texas Intermediate (WTI) is likely to fluctuate between US$65 and US$90 per barrel, If there were extreme cold weather like last winter, the price of this energy could reach $100 per barrel in the first quarter of 2022.”
Vaccinations and new strains will influence market sentiment
Although the peak of the 2020 epidemic has passed, the new crown pneumonia epidemic has not yet ended. The acceleration of the global vaccination process and the emergence of new coronavirus variants may affect the recovery of travel, thereby affecting the demand for oil.
Azuara said: “On the demand side, the worries are expected to continue at least until herd immunity is reached. It is estimated that 70% of the world‘s population will need to be vaccinated to achieve herd immunity. Otherwise, we will continue to see possible threats to global economic activity and Changes in energy demand.”
To understand the risks of mutation, it is enough to look at what happened when the Omi Keron variant appeared in the last week of November 2021. Energy industry analyst Ellen R. Wald commented: “Since November 26, a total of 56 countries have enacted some kind of travel ban to prevent Omi Keron. The new travel ban may mean New restrictions on the movement of people and temporary suspension of flights have resulted in restrictions on fuel and oil demand.”
Inflation is a concern, rising costs will boost oil prices
Inflation has become one of the key issues in 2021, and its impact on the oil market, especially on prices, is one of the concerns of investors.
In the United States, according to the Consumer Price Index (CPI), the inflation rate accelerated to a level not seen in nearly 40 years, reaching 6.8%, the fastest increase since June 1982. At the same time, the producer price index (ppi) wholesale price rose by 9.6%. The Fed is finally worried about accelerating price increases. At its last meeting in 2021, the Fed unanimously predicted that it will raise interest rates three times in 2022.
Wald pointed out: “When inflation rises, oil prices will also be under corresponding upward pressure. Oil producers are facing rising costs in everything from labor to transportation to parts. In addition, the dollar value they get from selling oil is also Decline. As a result, the desire to sell each barrel of oil in exchange for more dollars has increased, creating pressure for rising oil prices.”
OPEC+ or increase supply again
There are also concerns that the supply of crude oil may increase in 2022, coupled with demand issues, which may adversely affect the oil market. Azuara explained: “According to the International Energy Agency, the average global oil production in 2022 is expected to be 101.41 million barrels per day, which is 5.46 million barrels per day higher than the average production in 2021. Even with the emergence of a new Omi Keron variant , OPEC has made it clear that it will continue to increase its oil production.”
OPEC+ remains optimistic about the oil prospects in 2022. In its latest forecast, oil demand in the first quarter of 2022 is expected to be 99.13 million barrels per day, which will reach the level before the epidemic in the third quarter. OPEC+ believes that the impact of the Omi Keron variant will be modest and expects to increase its supply during 2022. However, the World Health Organization and other organizations still define the risk posed by Omi Keron as “very high.” There is no doubt that this issue will become a factor in determining the price trend in the first quarter of 2022.
The geopolitical situation may cause oil price fluctuations
The oil market will continue to be affected by other geopolitical factors, which will still be a risk facing the oil market. Including the progress of negotiations on the Iranian nuclear agreement and the geopolitical situation in Russia.
For example, Wald said: “Russia is currently the third largest oil producer in the world. Due to European military actions, Russian oil may face some kind of sanctions from the United States. (Russia also provides more than half of the EU’s natural gas in Ukraine. There are also several natural gas pipelines). Russia’s involvement in the conflict may cause oil prices to soar.”
The oil market in 2022 may leave the epidemic behind, and demand and supply will fully recover to meet this demand. In a recent report, the U.S. Energy Information Administration (EIA) mentioned that it expects some “moderation” in the global oil market, and that supply will improve as demand conditions improve.
However, the aforementioned factors may put pressure on energy prices. Therefore, although oil investors have reasons to remain optimistic, the outlook for 2022 is still uncertain, and investors still need to be cautious.