Oil market is under pressure, but positive sentiment remains
After more than two months of rallying, oil prices posted their third consecutive week of losses, as the US dollar strengthened to new annual highs amid speculation over the release of the Strategic Petroleum Reserve and the expectation that the oil market balance may turn into surplus early next year. Fears of a new COVID-19 wave in Europe and Asia have also put pressure on oil prices.
The US currency may continue to strengthen while global markets expect interest rates to rise due to high inflation in the US. According to the current plans of the US Federal Reserve, this may not happen until mid-2022, when the quantitative easing program will be fully completed. A strong dollar can become an obstacle to the growth of oil prices, since this will make oil more expensive for international buyers.
On the fundamental side, last week the Energy Information Administration lowered its forecast for oil demand for 2022 by 0.3 million barrels per day, and the Organization of the Petroleum Exporting Countries lowered its 2021 forecast by 0.2 million bpd. At the same time, the EIA revised its US oil production forecast for 2021 upward by 110,000 barrels to 11.13 million bpd, and for 2022 by170,000 barrels to 11.9 million bpd. However, the consensus forecast still sees a deficit until the end of this year, which will support prices.
However, if OPEC+ maintains its current production policy until Q1 of 2022, the oil market will be tipping into a supply surplus by that time. This explains the group rationale for maintaining the status quo at its last meeting despite rising prices and extreme pressure by major consumers.
In addition, a group of Democratic senators had sent a letter to the US president with a call to ban oil exports and begin commodity interventions from the SPR, this could reduce US oil imports. In practice, it is unclear whether a release would have much impact on prices beyond the immediate short term, as the volume of extra oil that could be made available would be too limited.
Despite the recent sell-off, the positive sentiment in the oil market remains, which ensures relatively stable oil price outlook.
Dr. Namat Al-Soof
Against this background, despite the bullish US stocks inventory data, the Brent and West Texas Intermediate futures were unable to overcome the $85 and $84 a barrel marks respectively and consolidated lower at $82.2 and $80.8 a barrel. Forecasts on how the Fed will react in the coming weeks will continue to drive crude prices onwards.
However, there is no reason to expect a price breakdown any time soon, as supply is still limited and demand remains resilient as the market moves from an active recovery caused by a revival in demand for goods (which stimulated demand for energy) to a recovery in demand for services.
In the US, for instance, air travel restrictions were eased last week, which should support a recovery in jet fuel demand. Gasoline and diesel consumption has returned to pre-pandemic levels, with proxy indicators in the US suggesting that, even with a seasonal decline in automotive activity, oil consumption remains high. India also reported record domestic gasoline sales in October.
Despite the recent sell-off, the positive sentiment in the oil market remains, which ensures relatively stable oil price outlook. The world oil demand continues to grow and, according to JPMorgan Chase, has reached in November the pre-pandemic level of 100 million bpd.
In addition, the approval of a $1.2 trillion infrastructure bill in the US creates prerequisites for a further increase in oil demand. Meanwhile, US producers are maintaining their spending discipline, cautiously increasing production, which remains nearly 2 million barrels lower than the pre-pandemic peak of 13.1 million bpd, according to the EIA.
Further support for oil prices was provided by strong data on exports from China, indicating a recovery in consumer demand in the world ahead of the holiday season, as well as amid a softening of the electricity shortage.
The latest developments in OPEC are also positive. Saudi Arabia raised the December official selling price for its flagship Arab Light for Asia by $1.4 to a premium of $2.7 a barrel over the Oman/Dubai average, signaling expectations for the continued imbalance between demand and supply. It is worth noting the Kingdom is raising prices even after Chinese oil imports fell in October precisely because of the international oil price rally.
Indeed, the oil price rally is far from over. Some of the biggest banks, such as Goldman Sachs, have forecast oil again reaching the $100-a-barrel level; Bank of America is predicting oil will reach $120 by 2022. The industry also sees oil prices higher for longer. The president of the Texas Independent Producers & Royalty Owners Association, a trade group, expects oil prices to rise near $90 a barrel and stay there at least through the winter. And with OPEC+ not planning to change its production strategy, such price scenario is not excluded.
• Dr. Namat Al-Soof is an Iraqi oil expert with long experience in upstream and market analysis. He held senior analyst positions at OPEC, IEF in Riyadh, and OPEC FUND for International Development. Currently, he is a consultant to a number of companies in the oil industry.