Brent is unlikely to stray far above the $100 mark in 2022
The crude price for Brent — the dominant global benchmark for oil pricing — surged to more than $96 per barrel this week, the highest since 2014. The International Energy Agency (IEA) predicts that the world’s oil demand will rise to 99.7 million barrels per day (mb/ d), returning to its pre-Covid-19 levels. In contrast, Energy Intelligence’s forecast sees 2022 averaging 100.5 mb/d with highs of 103 mb/d in peak months. However, the wild cards for determining oil prices in 2022 will predominantly be supply-side factors.
This year, the biggest swing factor for oil price is the possibility of a war between Ukraine, supported by the West, and Russia. For the past few weeks, this development had the oil market on edge, fuelling bullish sentiments. A conflict could raise crude prices to more than $100 per barrel. Russia, the thirdlargest oil producer after the United States (US) and Saudi Arabia, had a crude output of about 10 mb/d in December 2021. Apart from that, Europe is about 40% dependent on Russia for natural gas. So a dialling back of Russian gas will have a reverberating effect on oil prices, pushing it up further.
The US is scouring the world for alternative fuel suppliers, including West Asia, Norway, Africa and Japan, should there be disruptions in Russian supplies to Europe. Irrespective of public posturing on Ukraine, Europe’s energy reliance on Moscow is one of the greatest buffers against a conflict spiralling out of control. Europe is reeling from steep gas and electricity prices. A precursor of what awaits a war was played out last fall when Russia switched off the gas supply over its contractual obligations amid an energy crisis in Europe. Moreover, the US is unlikely to find adequate additional volumes at such short notice. So, the White House is unlikely to impose crippling sanctions that target Russian exports of crude or petroleum products.
The outcome of the Iran nuclear deal negotiations will also impact the pegging of the average crude price. The US, the United Kingdom, France, Germany, Russia and China (P5+1) and Iran, led by the new Ebrahim
Raisi administration, have entered the eighth round of negotiations to restore the Joint Comprehensive Plan of Action, which entailed restricting Iran’s nuclear programme in exchange for the removal of Washington’s sanctions against Tehran, including economic sanctions in the oil and banking sectors. If Iran sanctions are lifted, then we will see an additional 1.5 mb/d to 2 mb/d of gradual increase in supply.
IEA predicts that the world’s spare oil production capacity, which helps to keep the markets calm, will fall by the end of 2022 as the Organisation of Petroleum Exporting Countries+Russia (OPEC+) producers increase their output. This is primarily due to underinvestment in the sector to meet the growing demand for crude. Spare capacity, the volume of crude production that can be brought on within 30 days and sustained for at least 90 days, acts as a cushion against considerable fluctuation in prices in case of major unplanned outages. A hopeful prospect against crude price rise is the output from the US shale patch, which is “re-booming” this year driven by the private sector with a forecasted production surge of between more than 1 mb/d to 630,000 b/d, estimated by the Energy Information Agency (EIA) in 2022.
Meanwhile, OPEC+ continues to undershoot in its promise of injecting additional volumes of crude into the global pipelines. In April 2020, it withheld global supply up to a whopping 10 mb/d to put a floor under oil prices from flagging to negative levels. This was unprecedented. Since then, OPEC+ has been increasing its oil supply to the markets in a staggered fashion in tandem with global demand.
Even in the case of a war between Ukraine and Russia and another deadlier mutation of the coronavirus, Brent is unlikely to stray far above the $100 mark. While EIA has predicted an average Brent price of $82.87 per barrel, it is likely to be above $85 for 2022.