What to happen to oil prices in 2022?

Multi-vector factors are affecting the quotations. It is a big question what will prevail

Global oil demand will return to the pre-pandemic level in a year, says Leonid Fedun, Lukoil's vice president for strategic development. Artur Safiulin, a columnist of Realnoe Vremya, economist with many years of banking experience, shares his vision on the development of the situation on the oil market in 2022. In the column for our publication, he analyses the conclusions of analysts that prices will stay above $60 per barrel and writes about the prospects of the market.

Impact of the pandemic

During the lockdown period at the beginning of 2020, the demand for oil collapsed — flights, cruises, transportation, trips to work stopped. The subsequent increase in the supply of crude oil and the lack of places for its storage led to that in April last year oil futures generally went into negative territory.

At the height of the collapse in the oil market, sellers of WTI contracts themselves paid buyers $37 per barrel. This situation forced manufacturers to drastically reduce production.

The recovery of world economies faster than expected led to the opposite situation — demand began to exceed supply. As a result, oil prices not only rose, but also broke through the levels that existed before the pandemic.

What is happening in global market

Since the beginning of the year, Brent crude oil has risen by 52%. Experts expect to maintain the balance in the market in 2022. The recent US decision to use 50 million barrels from strategic reserves will not affect the prices in any way, since this volume is only 0,15% of the annual supply.

It is no secret that the oil supply market is ruled by the OPEC+ association, which determines the production level of all key suppliers and sets itself the task of avoiding a sharp drop in the price of a barrel. This is, in fact, a cartel that few people in the world are happy with. There is constant pressure on the organisation — the United States would like the consortium members to agree on the pace of increasing supply at a higher rate. The world economy needs cheaper oil, there is nothing surprising here. But following the meeting in early December, the alliance once again confirmed its official position — production will increase at the previously agreed pace. On November 4, it was decided to increase production by 400 thousand barrels per day in December. The next meeting is scheduled for January 4, and according to experts, we should not expect changes in the amount of production.

Traditionally, in January, there is a seasonal weakening of demand for oil and petroleum products. The spread of the new strain of coronavirus is also added to weak demand, which can bring new lockdowns and, as a result, a drop in oil demand. All these factors make the probability of an increase in production from OPEC + minimal. As the UAE Energy Minister noted in the first quarter of 2022, an surplus balance in the market is expected and an additional increase in supply in these conditions does not make sense. In addition, the release of volumes from stocks by a number of countries will relieve tension at the beginning of the year. A reduction in production is also unlikely, since the alliance will take such measures only with a sharp drop in prices — up to $50-55 per barrel.

Price forecasts

Naturally, prices may rise and may fall. It all depends on a combination of factors at one time or another.

The growth forecast is supported by that, despite the expected excess of oil in the first quarter of 2022 (due to the opening of reserves in a number of countries), the low level of reserves among producers negates the possibility for a sharp drop in prices. Besides, high inflation in the world will support the cost of raw materials. Further unpacking of oil reserves will depend on price dynamics and OPEC+ decisions. The decision not to increase production and an increase in prices over $80 per barrel will entail additional sales from strategic reserves. The consensus opinion remains that the price level will stabilise at $60-65 per barrel, as Leonid Fedun notes.

Serious factors will hinder the further growth of quotations. First of all, this is an increase in production, since in 2021, there was a significant increase in drilling activity in the world, and in January-February next year the market will move from deficit to surplus. This is not taking into account the very “unpacke” volumes from state reserves. Secondly, due to the tightening of monetary policy in the United States, the dollar will also strengthen. Together, these two factors will exert negative pressure on the quotations.

There is an opinion that quotations will fall rapidly due to an oversupply in the market, up to levels of $45 per barrel. After all, in addition to OPEC+, there are a number of producers that are actively increasing production (USA, Canada, Brazil and others). According to the adherents of this forecast, in the first half of next year, market sentiments will be determined by the growth of supply, which will significantly outpace the strengthening of demand. In 2021, global demand increased by 5,1 million barrels per day. According to forecasts, in 2022 the increase will be only 3,6 million barrels. The supply, on the contrary, will demonstrate a rapid growth — from 1,8 million barrels per day in 2021 to 5,3 million barrels in 2022. OPEC+ needs to monitor its production very closely in the first half of next year, as they seem to have reached overproduction, and it may be worth reducing production. Low oil price carries additional risks for the global economy.

“The risk of price reduction comes from the possible emergence of new strains of coronavirus”

In conclusion, I would like to note that the consensus forecast for oil prices is the level of 60-70 dollars per barrel. This level suits both producers and consumers. Analysts believe that global demand in 2022 will be higher than before the pandemic, and global reserves turned out to be 5% below the five-year average (but this figure is rapidly declining due to the production activity of all market participants).

In general, the risk of a surge in prices can be created by a low level of oil reserves, the restoration of air traffic volume, a low level of available production capacities. The risk of price reduction comes from the possible appearance of new strains of coronavirus (and new lockdowns, as a result), the use of strategic reserves by a number of countries, the weakening of the sanctions regime against Iran (only this country alone can bring quotations down, returning to its usual production level). It will be interesting to observe at what level the oil market will find its balance. There are a lot of different vector factors, and the results can be diametrically opposite.

Artur Safiulin

The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.