Even as the Omicron variant of the coronavirus spreads rapidly and threatens to at least stall travel and economic activity, forecasters are sticking to bullish expectations for demand in the year ahead while eyeing potential supply challenges.
Brent crude, the international benchmark for oil prices, eclipsed $88/bbl in Wednesday trading, reaching a high last seen in 2014 as markets absorbed expectations for strong consumption rates across North America, Europe and Asia this year.
The International Energy Agency (IEA) said Wednesday the global economy, while briefly dinged late in 2021 and early this year by Omicron, is weathering the latest virus storm far more nimbly than previous iterations of the pandemic. The global energy watchdog said oil demand would climb throughout most of 2022 as a result.
IEA said that, while Omicron cases surged worldwide in December, global oil demand climbed by 1.1 million b/d to 99 million b/d. The Paris-based agency expects the pace of growth in the first quarter to modestly ease from December, citing typical lulls in travel following the holidays and at least some impact from the virus.
However, “we have raised our global demand estimates by 200,000 b/d for 2021 and 2022, resulting in growth of 5.5 million b/d and 3.3 million b/d, respectively – due to softer Covid restrictions” than previously anticipated.
Governments across the world have imposed some new restrictions amid the Omicron wave, but with a few exceptions, widespread lockdowns have not been in their playbooks as most countries focus on vaccination campaigns to combat the virus and enable economic momentum to gather further steam in 2022.
The Organization of the Petroleum Exporting Countries (OPEC) on Tuesday said in its monthly outlook that it expects strong crude consumption growth in 2022, despite Omicron. OPEC researchers predicted global demand would rise by 4.15 million b/d and that consumption would exceed 100 million b/d in the third quarter, returning demand to pre-pandemic levels.
“While the new Omicron variant may have an impact in the first half of 2022, which is dependent on any further lockdown measures and rising hospitalization levels impacting the workforce, projections for economic growth remain robust,” OPEC said in the report.
Both OPEC and IEA expect production to increase further in 2022 following a gradual rebound in 2021 – and at some point this year, both said, supply should align with demand or even overtake it.
OPEC, headed by Saudi Arabia, and a Russia-led group of allies known as OPEC-plus, earlier this month agreed to increase production by 400,000 b/d in February, continuing a pace of monthly supply increases the cartel began in August.
For the week ended Jan. 7, U.S. crude output declined by 100,000 b/d from the previous week to 11.7 million b/d, according to the Energy Information Administration (EIA). The late-December level had marked a high for 2021, according to EIA’s latest Weekly Petroleum Status Report (WSPR). The next WSPR is scheduled for release Thursday, a day later than usual because of the Martin Luther King Jr. holiday.
However, analysts said supply worries are remerging. IEA noted that inventories in the United States are at multi-year lows and need to rise by more than 1 million b/d to return to pre-pandemic highs.
Additionally, several members of OPEC-plus are struggling to keep pace with the cartel’s targeted increases, including war-torn Libya and both Nigeria and Angola, which have struggled with deteriorating infrastructure.
“Even if supply issues are patched up, there is still the larger threat of supply chain delays, a lack of supply in labor markets, and overall cost inflation on lifting oil from the ground after costly shut-ins from 2020,” Rystad Energy senior analyst Louise Dickson said Wednesday.
“The reason oil prices are reaching multi-year highs is the unexpected production gap the market is facing, as the theme so far for 2022 is that the oil market is short of the oil supply it anticipated,” Dickson added.
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