In Q4/21, the global oil market encountered a surge in energy prices. In particular, the ICE Brent spot price averaged at $83.7 per barrel in October and $80.8 per barrel in November, up from $73.2 per barrel in Q3/21. The increase in oil price had been caused by the easing of COVID-19 pandemic control policies around the world as a result of accelerating vaccine rollout, which leads to continuous economic recovery.
According to the Energy Information Administration (EIA) report in December 2021, global oil demand in 2021 was forecasted to increase by 5.10 million barrels per day from the previous year to 96.91 million barrels per day and would continue to increase by 3.55 million barrels per day to 100.46 million barrels per day in 2022. The global oil demand next year is therefore moving closer to the demand prior to the COVID-19 pandemic in 2019, at 101.7 million barrels per day.
In 2021, the electricity and energy shortage crisis, particularly in coal and natural gas, in many countries, including China, Europe, and India, have contributed to the rise in oil prices. Due to its greenhouse gas emission control, China was required to reduce coal production, which resulted in electricity shortages in 18 regions and the coal price surged to the highest rate in the past decade at $275 per tonne on 19 October, 2021, as China relies on coal up to 57% of the time to generate electricity for domestic consumption.
As winter is approaching, many countries are backing up their extra natural gas reserves, resulting in spiking liquefied natural gas (LNG) prices in the Asia-Pacific market on 6 October 2021, spotted at $56.3 million per one million BTU. The LNG price reached its highest peak in history, pressuring the gas to oil switching trend during the winter, but the price is liable to hit a new level if the temperature is much lower.
Source: DW Akademie (2021)
OPEC and its alliance (OPEC+) remain in control to delivery less than demand recovery from May 2020 to December 2022. Global oil market continues to be tight. Even with several major global oil importers, such as the U.S., China, South Korea, India, and the UK, announced the Strategic Petroleum Reserves (SPR) release of 80 million barrels of inventory to relieve the rising energy price crisis and have placed pressure on OPEC+ to raise the monthly production quota more than the existing plan of 400,000 barrels per day.
In the fourth quarter of 2021, the rapid global widespread of COVID-19 new variant, Omicron, first discovered in South Africa on 24 November 2021, overwhelmed investors as the situation could affect the economic recovery and oil demand. The identification of Omicron led to an overnight $10 drop in the price of ICE Brent crude oil on 26 November 2021 to $72 per barrel. Since the emerging of the Omicron variant, ICE Brent crude price has been moving to around at $70 – $74 per barrel.
In 2022, EIA forecasts that oil market will be oversupplied by 0.47 million barrels per day due to production increase from OPEC+. The widespread infection of Omicron is eyed as another crucial factor causing changes in oil prices.
Climate change has been another significant issue provoking the oil market. At the United Nations Climate Change Conference (COP26) hosted in Glasgow, Scotland. On 31 October–12 November 2021, leaders from over 100 countries pledged to cooperate in reducing greenhouse gas emissions, which is vital for short-term and long-term energy consumption frameworks.
The U.S. once again joined COP21 on February 19, 2021, after the former president, Donald Trump, withdrew from the contract on 4 November, 2020. At this year’s conference, The U.S. drove other countries to submit to climate change policy by limiting global warming well below 1.5 Celsius compared to pre-industrial levels.
The U.S. vowed to limit and reduce 52% of carbon dioxide emissions from 2005 levels by 2030, while the European Union announced to reduce 55% of emissions from 1990 levels by 2030. China aims to reduce carbon dioxide emission levels to Carbon Neutrality by 2060. Other countries submitted their collaborative agreements, including solutions to ban deforestation and a 30% methane emission reduction from 2020 levels by 2030; promoting clean technology policy; and setting global standards for carbon tax. Environmental measures on global warming have taken effect on the world oil market accordingly. The Net Zero policy announced by The U.S. aims to accomplish its mission by 2050. This will result in an increase in innovative clean energy technologies, involving more electric vehicle demand and reducing oil demand, which could put pressure on future oil demand and prices.
The negotiation of the Joint Comprehensive Plan of Action (JCPOA) among P5+1countries, involving the U.S., England, France, China, Russia, and Germany with Iran is the geopolitical factor in focus in 2022. If the ban that the U.S. imposing on Iran is lifted, Iran could export an additional of 0.5 - 1.0 million barrels of crude oil by the second half of 2022.
Conflicts between China and the U.S. are another aspect to watch out for. Recently, the U.S. government announced sanctions against the Winter Olympic Games hosted between 4 and 20 February, 2022 in Beijing, China by refusing to send diplomats and government officials to participate in the event. Instead, only the athletes will take part in the games to express the national stance against alleged crimes against humanity in the Xinjiang region. Meanwhile, China has announced measures against the U.S. and this could lead to reignite the trade war between the two countries.
Other factors include tensions between the U.S. and Russia as a result of Russia's increased military presence along its border with Ukraine. On 7 December, 2021, The U.S. warned Russia that if the situation worsened, it would impose economic sanctions, affecting natural gas supply in Europe and global energy prices.
Source: Thaipost (2021)
Considering the economic front, capital movement injected by the U.S. Federal Reserve (Fed) has been adjusted to reduce mortgage-backed securities and bond purchases program by $15 billion per month to $30 billion per month starting in January 2022. The monetary supply, at $90 billion in December 2021, will gradually decrease until reaching the termination of Quantitative Easing (QE) in March 2022. The committee also indicated an increase of three quarter-percentage points by the end of 2022. A strong U.S. currency may increase risks to assets such as commodities.
In conclusion, PRISM predicts Dubai crude oil spot prices in 2022 will average at $67 – $75 per barrel, based on the assumption that economic recovery continues to develop relying on effective COVID-19 control measures. Meanwhile, economic stimulation plans launched by governments and leading central banking institutions around the world are anticipated to proceed with appropriate caution without impeding on overall recovery. OPEC+ is expected to collaborate in oil production control until the end of 2022 as per its agreement to increase production capacity according to demand.
International Market Analysis Team,
International Trading Business Unit,
PTT Public Company Limited