Oil Insights

Oil prices continued to rise as Brent crude reached 99 dollars, and then some declines began to move around 97 dollars. Oil rose significantly in 2021 and 2022 after the start of the economic recovery, with Brent rising by 51% in 2021. The rise in 2022 continued at a rate of 22% to offset the losses in 2020, falling by 70% from the price of $70 per barrel to nearly $18 per barrel and then rising from the beginning of July 2020 until now February 2022, achieving a rise of 460%.

At current prices, we see some expectations of continued bullishness, with JPMorgan expecting the price of a barrel of oil to reach 125 dollars in the second quarter of 2022. Sachs' Gold Bank believes the price of a barrel could reach $100 in 2022. However, before we trust these expectations, what are the reasons for this current rise?

There are two types of power affecting the market: supply and demand, so we will try to present the most important factors affecting both sides of the market.

Demand Side:

According to EIA “We estimate that 99.0 million b/d of petroleum and liquid fuels were consumed globally in January 2022, an increase of 6.6 million b/d from January 2021. We forecast that global consumption of petroleum and liquid fuels will average 100.6 million b/d for all of 2022, which is up 3.5 million b/d from 2021 and more than the 2019 average of 100.3 million b/d. We forecast that global consumption of petroleum and liquid fuels will increase by 1.9 million b/d in 2023.” In addition, Inventories at the biggest U.S. crude storage hub fell to the lowest since September 2018. Meanwhile, the four-week average for deliveries of oil products from primary storage, a proxy for demand, rose to the highest in weekly data going back to 1990. The steady erosion of supplies has pushed gauges of market strength to their strongest levels in years, indicating near-term bullishness.


OECD industry oil stocks declined by a steep 60 mb in December, led by large draws in middle distillates across all regions. At 2,680 mb, oil inventories were 355 mb lower than a year ago and at their lowest in seven years. Stocks covered 59.6 days of forwarding demand, a decrease of 0.9 days from a month earlier and 3.2 days below the historical average. Preliminary data for January show OECD industry stocks falling by another 13.5 mb. in January


The oil market is so tight and demand is increasing in the short term that increased the premium of Brent oil’s front-month contract to the second month known as a prompt time spread expanded further after reaching the widest bullish backwardation structure since 2019, and the six-month time spread in Brent ‘the gap between most immediate prices and those six months later’ reached as much as $8.74 a barrel on Wednesday, according to ICE Futures Europe data. That’s the biggest in data going back to 2007. 


As most central banks seek to raise interest rates to control current inflation rates, we may see some decline in global demand rates in the medium term in 2022.


Supply Side:


On the other hand, as global demand recovers, we see that oil-producing countries have not been able to recover in a large way as they have not reached pre-pandemic production levels yet.

There is a significant difference between the targets that OPEC+ countries set in terms of their production levels and current production; this gap is close to 1 million barrels a day. The problem for many OPEC+ members is that they are not able to bring back the barrels they’ve pledged. The 10 Organization of Petroleum Exporting Countries members that are subject to quotas pumped 23.9 million barrels a day in January, according to IEA data, compared with a target of 24.6 million barrels daily

Source: Bloomberg

On the positive side, the Energy Information Administration said on Jan. 11 that the U.S. will end the year producing about 12.2 million barrels of oil a day, 630,000 barrels a day more which is a more conservative forecast than others: ConocoPhillips’s Chief Executive Officer Ryan Lance, for instance, said last week that U.S. crude output may grow by 800,000 barrels a day this year. With crude trading near $90 a barrel, and most Permian Basin production breaking even at $50 or less, some public independents might still break ranks. At these prices, there’s a large profit incentive to drill more.

Exxon Mobil Corp. said it plans to boost output by 25% this year in the Permian Basin, the biggest U.S. oil-producing region. That comes four days after Chevron Corp. announced it will ramp up its own Permian supplies by 10% from an even larger production base. The number of rigs drilling for oil in U.S. basins jumped the most in four years this week, the latest sign that the shale patch is booming again as crude prices soar. Oil rigs in the U.S. rose by 19 to 516 this week, the biggest gain since February 2018, according to Baker Hughes data released Friday. While the expansion was seen across several regions, Texas added a combined 13 rigs in the Permian, Eagle Ford and Barnett play.


According to EIA, Canada, Brazil ,and Guyana could add an additional 460 kb/d in 2022. At present, Iran's attempts to reach a nuclear deal with the United States and Europe, and if an agreement is reached, sanctions on Iran's oil exports, which could reach 1.3 million barrels per day, will be lifted, which could help supply strongly.


OPEC and EIA expect supply to exceed strong global demand at the end of the second quarter of this year, with EIA expecting the average barrel price to reach $87 in the second quarter, $75 in the fourth quarter of 2022 ,and $68 in 2023.


However, with the current political tensions between Russia, the United States ,and Europe escalating against the backdrop of Russia's attempt to invade Ukraine, we may see sanctions on Russian oil and gas exports, which will have a significant impact on the world supply, as Russia produces 10.5 mb/d in January 2022, which could raise prices further in the short and medium term.


The rise in oil prices has had positive effects on producing countries and companies. Russian revenues from oil and gas sales increased by $65 billion and Saudi Oil Company Aramco's profits in 2021 reached $77 billion. ExxonMobil also generated nearly $23 billion and Chevron $15.6 billion in 2021.


This rise has severely affected oil-consuming countries, bringing inflation to record levels. The St. Louis Fed estimates a 0.27 correlation between changes in oil prices and inflation. In other words, a sustained 10% rise in oil prices could cause the CPI to rise by 2.7%. Mark Zandi, the chief economist at Moody's Analytics, estimates that each increase of $10 per barrel is flying 0.1 percentage points from economic growth the following year.


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