Despite higher prices, oil market faces challenges
Crude prices have risen, buoyed by the expectation of stronger near-term oil market fundamentals. A declining US dollar value and a rise in speculative net length added support.
Investors remain bullish on the outlook for oil fundamentals. Investors bet on a tightening oil market amid supply constraints in several regions and large declines in US crude stocks to their lowest level since October 2018.
Meanwhile, market confidence improved amid signs of a mild impact on global oil demand from the recent global rise in COVID-19 cases.
China’s annual crude oil imports slid to 10.3 million barrels per day (bpd) in 2021, dropping for the first time since 2001, as Beijing clamped down on the refining sector to curb excess domestic fuel production while refiners drew down massive inventories. Imports will rise as throughput recovers after the event. Full-year imports will average 10.5 million bpd.
Asia crude imports are likely to have declined in 2021 on stock draws from high levels built a year earlier and lower-than-expected demand recovery caused by a resurgence in the COVID-19 pandemic. Imports will increase in 2022 on recovering demand amid the continued decline of crude production.
The majority of crude inflow growth will likely come from the Middle East. India’s December oil product demand was down, dragged lower by minor products such as LPG, naphtha, fuel oil and asphalt. India’s daily new COVID-19 cases have averaged 173,000 over the past week, up from around 8,000 in the same period a month ago.
The infections in cities like Delhi and Mumbai have already surpassed the delta peak in April 2021. India has already vaccinated 900 million people with at least one dose, and 644 million people have already been vaccinated fully.
Overall, global oil markets in the second quarter of 2022 are likely to be in a fragile balance and set to move to a structural surplus.
The Indian government has not resorted to any draconian restrictions such as lockdowns, but the states have imposed some restrictions such as night curfews and decreased office occupancy, leading to a drop in mobility. Environmental restrictions ahead of Beijing’s winter Olympics, as well as downside risks in fuel consumption levels due to rising COVID-19 cases mainly in India and China, could lead to pressure on Asian product markets in the near term, should lockdowns be re-implemented.
A recent decline in airline capacity impacted by COVID-19 travel restrictions, if ongoing, is expected to weigh on jet fuel markets and drive margins for the product lower, relative to its robust performance in December.
With US inflation, an interest rate hike by the Federal Reserve is now more likely in March. This may create volatility in the oil market at a time when Omicron is affecting US growth in the first quarter of the year.
Refinery margins in the US Gulf Coast increased, supported by a healthy domestic fuel pull from the manufacturing sector as well as firm gasoil and fuel oil exports. In Europe, margins were affected by a rise in product output and signs of significant recovery in product inventories. Meanwhile, Singapore margins were backed by stronger gasoil requirements for road transportation and power generation.
Some industries expect that a limited volume of extra Iranian oil exports will come into effect from the second quarter of 2022, with total volumes rising by 1.4-1.5 million bpd by the second half of the year. If the current negotiations are as successful, then it will certainly affect prices.
Libyan crude supply surpassed 900,000 bpd on Jan. 13, and crude output should soon reach 1.1 million bpd after weather-related shutdowns ended. Kazakh production is likely back or close to full capacity, after last week’s public unrest appeared to subside.
Looking at 2022 balances, OPEC+ may continue to add more oil over the next month or two but as surplus in the first half; the market does not look like it needs more oil this year. Omicron’s subsiding threat to oil demand and the resulting expectations of a demand growth recovery are bringing concerns over OPEC+ spare output capacity back to the forefront of market discussion.
While commodity prices have rallied extensively in 2021, little has been achieved in resolving market imbalances through either demand destruction or supply increases. In fact, omicron and China property concerns have done more to discourage capital flows into commodity investments than to damage global demand.
Higher prices have helped find a delicate balance in Europe. Switching from gas to coal, industrial demand abatement, strong North Sea production and increased LNG imports have come in to offset lower Russian supply. Key risks include colder weather, further Russian supply disruptions, or an increase in Asian LNG demand. While prices are expected to decline with the normalization of storage inventories, tail risks are still skewed to the upside due to low stock levels.
The surge in price came as demand concerns have eased and Chinese authorities are reportedly pushing for a more aggressive infrastructure plan to stabilize the economy. However, supply outages due to extreme weather conditions are easing in the US and Ecuador, while oil production in Libya, Nigeria, and Kazakhstan’s Tengiz field are rebounding after protests temporarily halted operations. Furthermore, Brazil and Canada are expected to ramp up volumes as maintenance eases. Overall, global oil markets in the second quarter of 2022 are likely to be in a fragile balance and set to move to a structural surplus.
• Mohammed Al-Shatti is a Kuwaiti oil analyst.