Despite a November lull imposed by the Omicron variant of the coronavirus, crude prices in the United States and globally were positioned Thursday to finish 2021 up more than 50% on the year, led upward by mounting demand for travel fuels and heating oil that outshined modestly increased production levels.
West Texas Intermediate (WTI) oil in the United States traded around $77/bbl on Thursday, far higher than the $48 level at which it started 2021. Brent crude, the international benchmark, hovered near $80 in Thursday trading, well above the sub-$52 price it fetched at the beginning of the year.
The prices mark a stark reversal from the doldrums of 2020, when the coronavirus paralyzed demand and, in the early days of the pandemic, briefly sent oil prices into negative territory.
Should the United States and other major economies continue to navigate the pandemic without the widespread business lockdowns and travel restrictions endured in 2020, traders said demand is likely to continue climbing, and prices could remain elevated deep into 2022.
“Oil is a reflection of economic activity, and there’s so much pent-up demand across the global economy driving momentum now,” U.S. Global Investors Inc.’s Mike Matousek, head trader, told NGI’s Shale Daily. “I think markets expect that to continue well into the year ahead, and oil prices show that.”
The Federal Reserve Bank of Atlanta estimated the U.S. economy grew at a 7.6% annual rate in the final quarter of 2021 – one of the strongest quarterly advances in a generation. Federal Reserve researchers in December forecast U.S. economic growth of 4% in 2022.
To be sure, the pandemic ebbed and flowed throughout 2021, making economic projections dicey, and the Omicron variant is expected to curb the pace of growth at least temporarily early in 2022 as cases mount in the winter months.
The concern extends to energy. In November, after Omicron emerged, Brent and WTI prices finished the month more than 15% lower, marking the largest monthly decline since the coronavirus was declared a pandemic in March 2020.
Still, prices in December rebounded again. Economists increasingly expect lighter impacts from new variants than previous virus waves, given increased vaccination levels and governments’ collective aversion to new lockdowns.
“The Omicron variant is likely to be a near-term constraint on growth, but a temporary one,” said Raymond James & Associates Inc.’s Scott Brown, chief economist.
If he is right, energy demand could continue surging.
Robust demand for travel fuels derived from oil – in addition to mounting calls for natural gas to fuel power plants and heat homes – galvanized seismic price gains in 2021.
November energy prices jumped 33% from a year earlier — far more than any other category tracked by the U.S. Bureau of Labor Statistics — and rose 3.5% from October. The cost of gasoline was up more than 58% year/year in November, the latest month for which data was available.
Energy commodities – chiefly oil and gas – climbed 5.9% month/month in November and 57.5% year/year.
Of course, the soaring consumer energy prices added to widespread inflation concerns, Matousek said, and participants across energy markets are leery about runaway price increases that would eventually curb demand. What’s more, inflation has hampered energy companies that focus on equipment, storage, transportation and refining – areas affected by high fuel and input costs.
Still, Matousek thinks that over the course of 2022, oil and gas prices are more likely to level off at high but reasonable levels well below $100/bbl as production gradually ramps up to meet demand. Output “is coming back,” he said.
The Federal Reserve Bank of Dallas’ latest quarterly survey of energy executives found that, on average, respondents predicted WTI would close 2022 at $75.
Production in the Lower 48 and globally is rising. The Energy Information Administration’s (EIA) latest Weekly Petroleum Status Report showed crude output reached 11.8 million b/d for the week ended Dec. 24 – a 2021 peak and up 200 million b/d from the previous week.
Elsewhere in the world, the Organization of the Petroleum Exporting Countries (OPEC) and allies known as OPEC-plus recently agreed to ramp up production by 400,000 b/d in January to help align supply with demand, continuing a pace of monthly supply increases the cartel began in August. The cartel meets early in January to consider further increases to keep pace with demand.
Over the four-week period ended Dec. 24, U.S. gasoline consumption averaged 9.3 million b/d, up 17% from a year earlier, while distillate fuel demand averaged 4.1 million b/d, up 8%. Jet fuel consumption spiked 21% to 1.5 million b/d.
In December, the International Energy Agency (IEA) forecast global crude demand would grow by 3.3 million b/d in 2022, reaching pre-pandemic levels of 99.5 million b/d, after gaining 5.4 million b/d in 2021.
IEA researchers shrugged off Omicron. “New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous Covid waves, not least because of widespread vaccination campaigns,” they said.
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