As new variants of the virus sweep the world, the future supply and demand relationship in the oil market has become increasingly unpredictable.
The divergence over the outlook was evident in this week’s major reports on the oil market. OPEC on Monday raised its forecast for global oil demand in the first quarter of 2022, saying the Omicron variant of the coronavirus would have only a mild and short-lived impact. At the same time, the IEA is relatively pessimistic. In its report on Tuesday, it warned that Omicron would hinder demand recovery and lowered its crude oil demand forecast for 2022.
In the short term, the oil market is facing a series of risks. “All short-term risks, from Omicron to the Fed’s tightening policy, are very damaging to the short-term outlook for oil prices.” OANDA senior analyst Edward Moya warned, “The spread of the virus in Europe will hit harder than expected. “Big, when you’re thinking about family holiday gatherings, the short-term outlook could be revised down significantly over the next month.”
OPEC and IEA “tit for tat”
At a time when the outlook for oil market demand is unclear, OPEC has significantly raised its forecast for global oil demand in the first quarter. Although this year’s demand recovery has been delayed to some extent by new variants of the virus, OPEC believes that the overall risk is still limited.
Specifically, OPEC stated in its monthly report released on December 13 that it expects global average daily oil demand to reach 99.13 million barrels in the first quarter of 2022, an increase of 1.11 million barrels from last month’s forecast. In addition, OPEC has also raised its global demand forecast for 2022 by 200,000 barrels per day.
“The partial demand rebound previously expected to occur in the fourth quarter of 2021 has been delayed to the first quarter of 2022, and demand will rebound more steadily in the second half of 2022.” OPEC said in the report, “As the world becomes Better equipped to deal with COVID-19 and its associated challenges, the impact of the Omicron variant is expected to be mild and short-lived.”
Zhu Runmin, a senior economist in the petroleum industry, told a reporter from the 21st Century Business Herald that as humans analyze and study the new coronavirus more deeply, vaccines and therapeutic drugs have been launched and promoted. Overall, the epidemic has been greatly alleviated. Therefore, OPEC’s response to the epidemic is Optimism is also realistic.
In contrast, the International Energy Agency (IEA) was more cautious in its latest monthly report released on the 14th, lowering its oil demand forecast for this year and next. The IEA emphasized in its monthly report that as the new strain of Omicron hinders international travel, resulting in a slowdown in the recovery of global oil demand, global oil production will exceed demand from December and will face greater oversupply early next year.
Therefore, the IEA lowered its average oil demand forecast for 2021 and 2022 by 100,000 barrels per day, and lowered its global oil demand forecast for the first quarter of next year by 600,000 barrels per day. However, the IEA is not an extreme pessimist. Regarding the ongoing recovery in oil demand, the IEA expects that the surge in COVID-19 cases will temporarily slow down the process rather than completely subvert it.
In comparison, although the IEA is more pessimistic than OPEC, the two have one thing in common: they both believe that the risk of the epidemic is still limited and will not have a disruptive impact on the oil market.
It should be noted that although OPEC has a more optimistic view on the oil market, it also has a backup plan. At the ministerial meeting held earlier this month, OPEC+ decided to maintain the original production increase plan and increase crude oil production by 400,000 barrels per day in January. However, OPEC has also maintained the flexibility and openness of its policy. If necessary, it can reconvene the meeting in a short period of time and change the course at any time.
Are supply issues the bigger risk?
For the oil market, the short-term risk is that while the epidemic is still dragging down the demand outlook, U.S. crude oil production is gradually increasing under the stimulation of high oil prices.
According to the monthly forecast released by the U.S. Energy Information Administration (EIA) on the 13th, production in the largest shale basin in the United States will surge to a record high in January, and crude oil production in the Permian Basin may increase by 71,000 barrels per day to 5.031 million barrels per day. barrels per day, exceeding 5 million barrels per day for the first time.
Zhu Runmin told reporters that changes in U.S. shale oil production are closely related to WTI crude oil prices. If international crude oil prices continue to rise, the growth of U.S. shale oil production will be a basic trend, but a short-term surge is not in line with the laws of industry development, and the infrastructure required for crude oil production does not allow it.
“The change in U.S. shale oil supply is first to adapt to changes in U.S. crude oil prices. The rise in crude oil prices has driven the growth of U.S. shale oil production; but from another perspective, as U.S. shale oil production continues to grow, it will also have an impact on crude oil. Price increases have a restraining effect.” Zhu Runmin further analyzed.
Data from energy consulting firm Rystad Energy shows that by 2022, capital expenditures by U.S. shale oil producers will increase by nearly 20% to $83.4 billion, the highest level since the beginning of the epidemic. Nonetheless, this is still about one-third lower than the forecast level in 2019, indicating that after the outbreak, companies made more prudent production decisions based on changes in crude oil prices.
In the long term, compared with oversupply, supply shortage caused by insufficient investment may become the biggest risk facing the oil market. Saudi Energy Minister Prince Abdulaziz said on Monday that the oil market could face a dangerous period as crude production could fall by 2030 due to reduced investment in exploration and drilling.30 million barrels per day less.
“We are facing a potentially dangerous period. Without more investment to maintain and increase production capacity, the world will face an ‘energy crisis’. In a way, I am not predicting, but warning, idle Production capacity will disappear,” the Saudi energy minister warned.
Zhu Runmin also told reporters that due to the continued sluggish investment in upstream oil exploration and development in recent years, there have been few new production capacity construction projects, and the new production capacity has offset the natural decline of oil fields, the tight supply and demand situation of insufficient global crude oil supply will once again occur in the near future. The emergence of crude oil will inevitably drive international crude oil prices into a new cycle.
This view has also been echoed by investment banks. JP Morgan analyst Christyan Malek said that insufficient investment has weakened the ability of OPEC and its allies to increase production. Brent oil prices may rise to US$125 per barrel next year, and may further rise to US$150 in 2023. Dollar.
Regarding the future demand for crude oil, Zhu Runmin told reporters that from the perspective of energy consumption structure, the proportion of oil has slowed down or even declined. This is the need for environmental protection and the result of human restraint. However, from the perspective of changes in absolute consumption, we have not found signs that oil consumption has entered a plateau period or even entered a downward trajectory. In the future, oil consumption will continue to be on an upward trajectory, and then the growth rate will slow down and gradually enter a downward trajectory. It reaches a high plateau period and finally enters a downward trajectory, which is in line with the basic laws of industry development.
Looking to the future, Zhu Runmin told reporters that energy conservation, energy low-carbonization and even decarbonization are inevitable trends. However, in order to avoid extreme changes in energy supply and demand, the world needs to conduct comprehensive, in-depth and detailed analysis and research on energy transformation, and it is necessary to plan in advance and do Plan well and implement it, and avoid acting too quickly.
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