Oil market to rebalance toward a surplus from February
Brent prices are averaging around $84 per barrel in November 2021, which is better than the levels seen in April 2020, when prices dropped to $20 per barrel.
Prices averaged lower this week due to market volatility from concerns about a new wave of COVID-19 in many countries, rising inflation and a soaring US dollar value. The US, meanwhile, signaled measures to ease oil and gasoline prices.
The decline in oil prices was, however, checked, as the US Congress passed a large infrastructure bill and the country lifted travel restrictions, which supported the demand outlook.
Prices fell slightly further after the Energy Information Administration reported a rise in US crude stocks. Recent data shows that US oil demand continues to rebound from the pandemic impact. These gains come as US vehicle miles traveled increased in August 2021, according to the Federal Highway Administration. Industrial production has also been supportive for US oil demand growth.
Initial weekly data for September and October indicates a continuation of recovery in the performance of transportation fuels. A strong employment report in the US and the recent approval of an infrastructure investment package of $1 trillion would likely support US and global economic growth estimations and demand recovery prospects.
With a 30-year high jump in US consumer inflation for October, the market is faced with current tightness in crude markets and negative risks to demand from monetary policy.
While the oil market will be supported by seasonal demand, lower gas and coal prices could reduce expectations for gas to oil switching, which could put pressure on oil prices. In Europe, the resumption of Russian gas flows to Germany at Mallnow and small injections into German storage at Rehden have calmed nerves and prices following a week of volatility.
There is growth in liquefied natural gas production expected in the coming weeks due to the resumption of operations at Equatorial Guinea LNG, and partial production recovery at Atlantic LNG, Peru LNG and Nigeria LNG, in addition to the commissioning of volumes at Sabine Pass Train 6 and Calcasieu Pass, which should help alleviate some supply side pressure during the peak of winter.
With a 30-year high jump in US consumer inflation for October, the market is faced with current tightness in crude markets and negative risks to demand from monetary policy, which would likely strengthen the greenback and negatively affect the purchasing power of emerging markets for, among other goods, oil. The oil market looks set to rebalance toward a surplus from February. The wave of supply expected in 2022 will bring more oil to the market.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.