After staging a spectacular rebound in 2021, oil has started 2022 with a bang.
A market that was supposed to suffer a ballooning surplus instead surpassed $80 a barrel recently as global demand shrugs off the Omicron variant, while a host of supply constraints hit producers from Canada to Russia.
Global oil demand roared back in 2021 as the world began to recover from the coronavirus pandemic. Overall world consumption potentially could hit a new record in 2022 despite efforts to bring down fossil fuel consumption to mitigate climate change.
For 2022, crude consumption is expected to reach 99.53mn bpd, up from 96.2mn bpd last year, according to the International Energy Agency. That would be a hair short of 2019’s daily consumption of 99.55mn barrels.
Such a rally would be bad news for fuel-hungry countries. It would also be a big blow to US President Joe Biden, who invested a lot of time and effort in jawboning prices lower and orchestrating a global release of strategic petroleum reserves.
The upbeat oil views will put pressure on both the Organisation of Petroleum Exporting Countries and the US shale industry to meet demand — after a year when major producers were surprised by the rebound in activity that overwhelmed supply and led to tight inventories worldwide.
In fact, movements in the price of oil are felt more keenly and quickly than any other commodity because it passes almost immediately into the cost of end-products like gasoline, diesel and jet fuel.
This month there were riots across Kazakhstan after the government there allowed the price of liquefied petroleum gas — a key road fuel — to surge.
But Opec has reduced its estimate of the surplus in global oil markets this quarter. It sees a surplus of 1.4mn bpd in the first three months of 2022, about 25% smaller than it estimated more than a month ago. The main driver of the change was a weaker outlook for supply from the coalition’s rivals.
Numerous Opec nations have struggled to add to output, while the US shale industry has to deal with investor demands to hold the line on spending.
Going forward, forecasters now say crude prices could resume their upward path in 2022 unless supply increases by more than expected.
Bank of America researchers estimate Brent will average $85 a barrel in 2022, due to low inventories and a lack of spare capacity.
For sure, there are roadblocks.
The biggest unknown is the Omicron coronavirus variant, as numerous countries have reimposed travel curbs which will hurt the aviation industry and consumption.
China’s worst Covid-19 outbreak since the inaugural flareup in Wuhan may threaten to derail oil’s winning streak by denting demand growth in the world’s largest crude importer.
The threat of the US Federal Reserve raising rates to combat rising inflation could also weigh on oil as it boosts the dollar, which makes oil more expensive for holders of other currencies.
But, for now, the market is staying bullish.
With investment banks calling for higher prices, and options contracts invoking the prospect of crude spiralling above $100, the commodity is threatening to intensify the inflationary pain felt by major consumers.
Longer term, oil companies say global energy future envisages rising demand and population growth, making crude an important fuel for decades to come. And the world is in need of a stable oil market with price equilibrium.
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