Over the past year, a recovery in energy demand driven by vaccination rollouts and economic restarts has helped crude oil rise more than 50%, making it one of the best-performing commodities. Looking back at the trend throughout the year, oil prices overall showed a volatile rise. Two waves of short-term corrections occurred in early July and early November respectively, corresponding to the new round of epidemic rebound caused by the “Delta” strain and the “Omicron” strain and the rebound in many countries. News of government selling off strategic reserves. Regarding the trend of oil prices next year, Goldman Sachs gave a target price of $100 two weeks ago.
Tamas Varga, senior market analyst at crude oil broker PVM Oil Associates, said in an interview with reporters that the epidemic is still the biggest risk facing the energy market, and the impact on the economy may reach its peak in the first quarter. At the same time, new production capacity will be added It will have an impact on the supply and demand relationship, and he believes that oil prices may enter a range-bound mode next.
Demand: The trend of the epidemic becomes the key
The resurgence of the new wave of epidemics is threatening the recovering economies and energy needs of various countries. The WHO pointed out that the new coronavirus mutated strain “Omicron” has appeared in more than 110 countries and regions around the world. Existing evidence shows that the Omicron strain has a significant transmission advantage compared with the Delta strain. In countries and regions where community transmission has occurred, the spread is significantly faster.
Varga told reporters that as new confirmed cases surge, the outlook for energy demand will undoubtedly cast a shadow, and economic recovery has become a race between the vaccination process and the spread of the virus.
In Europe, the epicenter of the epidemic, the number of newly confirmed cases in many countries has reached a new high since the epidemic. France this week launched a three-week new work-from-home policy and shortened the interval requirement for the third booster dose; Italy will ban dining in public places from December 30 to January 31, 2022, and resume outdoor masks At the same time, the use of new coronavirus passes will be expanded from February 1 next year; Belgium requires outdoor sports events to be held behind closed doors… It is not ruled out that more governments will follow up or upgrade restrictive measures.
Pressure from a potential economic slowdown is weighing on industrial energy demand. The latest preliminary readings of the Purchasing Managers Index (PMI) of major European economies in December fell across the board, indicating that the virus is beginning to have an impact on business activities and manufacturing. The Bundesbank said in its monthly report that Europe’s largest economy is likely to experience a recession this quarter as the resurgence of the new coronavirus epidemic triggers new lockdown measures, keeping shoppers at home and reluctant to go out. The economy shrinks.
Varga pointed out that judging from the structure of crude oil futures contracts, investors’ concerns about weak short-term energy demand still exist. The focus now is on the energy consumption performance of major consumer countries. The situation in Europe is not optimistic. China’s latest crude oil import volume rebounded from the previous month, which is a very positive signal. The US refinery capacity hit a record high last week, which also shows that market demand is still strong. . Next, we still need to pay close attention to the impact of the epidemic on overall global energy consumption to assess the changing trends of supply and demand.
Supply: OPEC+ controls the market to face test
In 2021, OPEC+, an organization of oil-producing countries, held a total of 11 ministerial meetings. The concerted efforts of all member countries on the issue of production restrictions have helped oil prices emerge from the shadow of last year. U.S. oil and Brent oil once exceeded the US$80 mark during the year, setting a new record A new high in the past three years.
Now OPEC+ has paid attention to the threat of a new round of epidemic. At the ministerial meeting in early December, the organization reached a consensus on the fundamentals and prospects of the oil market in an extremely brief statement. “We must monitor the market closely to understand the actual impact of Omicron,” the statement said.
Varga analyzed to reporters that a key point of the last OPEC+ meeting was that it retained the right to adjust production plans. In addition to the epidemic factors, the Organization of Oil Producing Countries will face the impact of joint sales of strategic reserves by many countries and increased production by non-OPEC oil-producing countries on the market supply. Considering the current oil price level, it will be difficult to “control the market” in the next year like this year. Significantly increased.
Non-OPEC oil-producing countries are stepping up their efforts. The International Energy Agency (IEA) previously predicted that the crude oil supply and demand relationship will be reversed in 2022, when non-OPEC countries will add 1.8 million barrels per day of production capacity, of which Canada and Brazil are expected to set a new record high, and the market is expected to reach 300 barrels per day in the fourth quarter. Thousands of barrels per day of excess production capacity. The latest data from the U.S. Energy Information Administration (EIA) shows that as the biggest “threat” to OPEC in the past few years, Permian shale oil production is expected to exceed 5 million barrels per day for the first time in January next year.
The “storage dump” led by the United States has also brought uncertainty to the supply side. China Business News reporter noted that the first and second batches of the U.S. government’s strategic petroleum reserves were awarded to Exxon Mobil and Marathon Petroleum Company. Previously, the U.S. Department of Energy had completed the bidding process for the 32 million barrel strategic petroleum reserve release plan. At the same time, Japan’s Ministry of Economy, Trade and Industry stated in a statement on December 27 that the government will invite bids to sell Oman crude oil in the Shibushi strategic reserve, with a delivery date between March and June. According to the Economic Commission Board under OPEC) estimates that if oil from strategic reserves of various countries flows into the market as planned, the global oil surplus will increase by an additional 1.1 million barrels per day in January and February next year.
Variables: The “Three Kingdoms Killing” between the United States, Russia and Iran
Geopolitical factors will also be an important variable in determining the trend of oil prices next year, mainly involving negotiations on the Iranian nuclear issue and the current tense situation in Ukraine.
According to Xinhua News Agency, on the 27th of this month, the Joint Committee of the Joint Comprehensive Agreement on the Iranian Nuclear Issue held the eighth round of negotiations in Vienna to continue discussing how the United States and Iran can resume compliance with the agreement. Iran’s focus will be on lifting all U.S. sanctions in a verifiable process that guarantees Tehran’s unimpeded oil exports. After 2018, Iran’s oil exports, its main source of revenue, fell sharply under U.S. sanctions.
Iranian Foreign Minister Hossein Amirabdollahian previously stated that relevant parties will focus on discussing a “new common draft” this time. The new round of negotiations will be based on this draft and involve the lifting of sanctions and inspections against Iran. And other issues. Eventually the money from the Iranian oil (sales) will be deposited in Iranian banks in foreign currency, so that all economic benefits stipulated in the Joint Comprehensive Plan of Action (JCPOA) can be enjoyed.
Combined with the challenges faced in previous rounds of negotiations, the outside world is paying close attention to whether this meeting can break the deadlock. JP Morgan predicts that Iran could add 1.4 million barrels per day of additional production capacity next year if the United States ultimately decides to lift sanctions.
Fluctuations in natural gas prices may also have a co-movement effect on oil prices. Last week, European natural gas prices hit a record high, which is closely related to the “shutdown” of Yamal-Europe, Russia’s important natural gas pipeline to Europe, and the delay in the certification of the Nord Stream 2 natural gas pipeline. The surge in natural gas prices has also caused some Fuel demand shifted to crude oil, supporting oil prices.
The situation in Ukraine is currently continuing to heat up, and the political game between the United States and its allies and Russia is gradually heating up. Russia and Ukraine have deployed a large number of military personnel and equipment in the border areas between the two countries. Russia emphasizes that NATO activities threaten Russia’s border security. Russia has the right to mobilize troops within the country to defend its territory. Ukraine, the United States and NATO claim that Russia has “invaded” Ukraine. trend. Russian media said that when Putin talked about the “red lines” in relations with the United States and its NATO allies, he pointed out that Russia has been pushed into a situation with nowhere to retreat. If NATO refuses to stop its eastward expansion, Russia will have various response plans.
Transversal Consulting energy industry analyst Ellen Wald released a report saying that Russia is currently the world’s third largest oil producer. Due to European military actions, Russian oil may face sanctions, considering that Moscow controls many European channels. The involvement of gas pipelines in conflicts may further cause oil prices to soar.
oil price forecast
After nearly a year of sharp increases, judgments about the supply and demand outlook have led to huge differences in agency forecasts for next year’s oil prices.
The U.S. Energy Information Administration lowered its forecast for global energy demand in the first quarter in its December Energy Outlook, predicting that the average price of WTI crude oil for 2022 will be US$66.42/barrel, revised down by US$1.86/barrel from the previous month. The average price of Brent crude oil in 2022 is expected to be US$70.05/barrel, revised down by US$1.85/barrel from the previous month.
Many institutions are optimistic about the trend of crude oil next year. Francisco Blanch, head of commodities at Bank of America, expects oil prices to reach $85 a barrel next year. He said that although the Omicron strain may derail the economic recovery a little, the United States does not intend to resume previous measures. (including stay-at-home and travel restrictions, etc.), a treatment for this variant is expected to be launched within the next two months.
“Commodity flag bearer” Goldman Sachs gave a target price of US$100, believing that against the backdrop of rising demand for aviation, transportation and infrastructure construction, global average oil demand will hit record levels in the next two years. Damien Courvalin, the bank’s chief energy research director, said that while the base case is for Brent crude prices to remain around $85 a barrel next year and into 2023, rising costs for drilling or unexpected supply shortages will force prices to rise. Surge high enough to destroy demand and oil prices could top triple digits.
Varga told reporters that due to the impact of the epidemic, market fundamentals will shift from insufficient supply to oversupply early next year. To prevent a return of the bear market, OPEC+ could consider temporarily abandoning plans to continue increasing oil production to solve the problem, at least for now. However, the risk is that market share will be lost to competitors, and oil-producing countries may be divided within themselves. Optimistically, as spring approaches, if there are breakthroughs in virus and vaccine research, which can alleviate the impact on the energy demand side, the subsequent global recovery can resolve potential supply rising risks, and Brent crude oil is expected to center at $70 Perform range oscillation.
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