Oil prices are forecast to hit over $100 a barrel in 2022, based on severe pressure from tight supply and demand fundamentals, resulting from the dwindling spare capacity of OPEC+ producers.
Just as global oil demand recovered from the pandemic-driven lows of 2020, energy markets are now facing a new energy crisis: this time due to problems caused by lagging supply which pushed prices up to the highest levels since 2014, and is threatening to expose the market to further vulnerabilities should any supply disruptions emerge.
Prices surged further, following the milder omicron variant to bolster investor confidence as it means fewer business-sapping restrictions.
Robert McNally, the founder and president of Rapidan Energy, told Anadolu Agency that $100 is possible in 2022, but crude prices are also expected to correct down to the $70-$80 level “as market fundamentals soften up a bit.”
“Rapidan is very sure crude prices will surpass $100 and rise to at least $150 in coming years as a new multi-year boom cycle gets underway,” he explained.
McNally said the key oil sector drivers include the pace and sustainability of oil demand recovery in light of COVID-19 and macroeconomic risks, such as central bank interest rate increases.
On Friday, the International Energy Agency (IEA) said central banks withdrawing financial support and rapidly boosting interest rates in the coming quarters could pressure economic and oil demand growth, predicting that higher oil prices may weaken demand growth.
Over $100 a barrel would not be a surprise for 2022, said Abhi Rajendran, a research director of Energy Intelligence, who underlined that sustaining such price levels are dependent on an escalation in the Ukraine-Russia crisis and on a failure to a resolution in the Iran nuclear talks. “We think it’s less important how high it goes but more what can be sustained.”
Rajendran further elaborated that he expects $90 a barrel into the summer.
“We already see geopolitical tension priced into the current market by at least $5… if those de-escalate, we see the market closer to $80 than $90. What can be sustained will depend heavily on the macroeconomic environment, and if it’s healthy enough to see ongoing demand growth despite higher prices… we are skeptical of this… we see prices settling back to the $80s later this year after all these things are sorted out,” he said.
-OPEC+ lost production reached 800,000 barrels per day since last year
On the supply side, McNally counted the speed of OPEC+ tapering and drop in its spare production capacity among important drivers impacting oil prices, along with a potential revival of US shale growth, mainly in the Permian Basin.
Due to technical issues and some other capacity constraints, the OPEC+ alliance could pump only 280,000 barrels per day (bpd) compared with a planned increase of 400,000 bpd in January, according to the IEA.
The group’s loss reached around 800,000 bpd since the start of 2021. According to the IEA, “the prevailing lower output levels versus stated monthly increases by the bloc have led to unintended consequences, with sharp draws in global inventories and supply shortfalls compounding tight oil markets.”
The IEA said by the end of this year the amount of oil lost could approach 1 billion barrels unless members with substantial spare capacity, concentrated in the Middle East, pump more to make up for those who cannot.
Although total effective OPEC+ spare capacity is currently around 5.1 million bpd, only 2.2 million bpd, held primarily by Saudi Arabia and the UAE, could be brought online in short order, the IEA said.
- Rising tension in Eastern Europe puts additional pressure on prices
McNally said geopolitical risks are becoming more important, especially as OPEC+ production growth and spare capacity shrink.
Tensions in Eastern Europe and a possible return of Iranian barrels to the market are further complicating the supply outlook and putting additional pressure on the market.
The removal of sanctions on Iran, a key supplier to Europe, to free up more barrels is becoming more likely as talks to revive the Joint Comprehensive Plan of Action (JCPOA) nuclear deal appears to edge closer to an agreement. Conversely, the potential enforcement of additional financial restrictions on Russia over its crisis with Ukraine showcases Russia’s role as the world’s second-biggest crude oil exporter and exposes Europe’s vulnerabilities given that Russia is a major supplier to the continent.
Of the nearly 11 million bpd of Russian oil produced in 2021, Europe imported some 4 million, according to the IEA. Of about 2.5 million bpd of crude oil imports, one-third was delivered via the Druzhba pipeline.
“The potential for sanctions on Russia’s oil exports looks remote, not least because of current high prices and the scale of the impact on markets, but an escalation of the conflict could disrupt flows,” the agency warned.
Most immediately at risk are roughly 250,000 bpd of Russian oil exports transiting Ukraine via the southern branch of the Druzhba pipeline to supply Hungary, Slovakia and the Czech Republic. Some 2.35 million bpd of Russian oil exports arrive in Europe through other pipelines and ports.
If Russian oil supplies via the Druzhba pipeline are interrupted, as was the case in 2019 due to contaminated crude, the EIA said these countries would have to draw on emergency oil stocks and seek alternative supplies.
By Sibel Morrow