July 1. 2022. 6:33

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Oil market overview. What's Happening With Crude Oil Prices?

Against the backdrop of worries over a new kind of Omicron COVID-19 and an attenuation of energy problem that boosted oil demand due to a gas-to-oil shift, spot crude oil prices slipped in November. The OPEC Reference Basket (ORB) slipped 2.1% that is US$1.74 in November to US$80.37/b on average as prices fell for nearly all medium and high sulfur fractions in America, Europe and Asia.

In December 2021, it tued out that the November collapse in oil prices was just a temporary correction. According to the results of December last year, the price of Brent oil rose by 13.3%, to $77.72 per barrel, and during the month periodically rose again to $80 per barrel. The price of Texas WTI crude in December rose slightly more than Brent, rising by 14.8% and falling to $75.01 per barrel.  

The rise in prices was influenced by an unusually cold December in Europe and the United States, which increased energy demand, as well as easing fears about the Omicron strain of coronavirus, which, although it tued out to be more contagious than many of the already known variants, is not as dangerous to human health as that terrorized mankind in the spring and summer of last year, the Delta strain.

The results of 2021 for the oil market tued out to be optimistic. The price of Brent increased by 38.7% over the year, and the price of WTI by 42.7%, and the oil market owes such positive dynamics primarily to the mass vaccination of the Earth's population against coronavirus and the gradual recovery in demand for oil. 

In December, the Inteational Energy Agency published a forecast for global oil demand growth of 5.4 million barrels per day by the end of 2021, which was associated with a relative recovery in air travel and tourism, as well as the absence in 2021 of such large-scale restrictions on the global economy as were a year earlier.

Global economy

While many challenges remain in the path of economic recovery, the global economy continues to improve. The global economic growth forecast remains unchanged at 5.6% for 2021 and 4.2% for 2022. The US GDP growth forecast for 2021 was slightly revised down to 5.5% from 5.8%, while the growth forecast for 2022 remained unchanged at 4.1%.

EU economic growth in 2021 has been revised down from 5% to 5.1% following stronger-than-expected GDP growth in the third quarter of 2021. However, given the resurgence of COVID-19 infections in the euro area, the GDP growth forecast for 2022 remains unchanged. 

The forecast for Japan was slightly lowered to 2.5% from 2.6% in the previous month, taking into account the easing dynamics in the third quarter of this year. The GDP growth forecast for 2022 remains unchanged at 2%. China's economy is expected to reach 8.3% in 2021 and 5.8% in 2022, unchanged from the previous month, but problems in the economy point to growing downside risk.

Meanwhile, India's growth forecast for 2021 remains at 9% and 6.8% for 2022. Brazil's growth forecast for this year remains at 4.7%, while the forecast for 2022 has been lowered to 2% from 2.5% due to strong inflation. And a subsequent increase in key interest rates could lead to a slowdown in investment and consumption next year.

Russia's GDP growth forecast for 2021 remains at 4% and 2.7% for 2022. Among the various challenges facing the global economic recovery, COVID-19 is expected to remain the dominant factor in the northe hemisphere winter season.

The latest data on inflation in the US and the Eurozone does not speak of an imminent improvement in the situation. It is also necessary to closely monitor the dynamics of producer prices in Asian countries. Both India and China, as well as Japan, experienced sharp increases in producer prices, while consumer inflation remained robust. These higher producer price levels could also push up consumer prices, but with some delay.

World Oil Need

The recovery of global oil demand, as well as the regulation of the oil market by OPEC +, has become the most important driver of oil price growth in 2021. Since August last year, OPEC+ began to gradually increase oil production by 400,000 b/day every month, but this increase, with a sharply growing demand, could not contain the increase in oil prices in October and December 2021. 

Events in Kazakhstan, which is a member of the OPEC+ agreement, became an additional driver of oil price growth in early January 2022, and although oil and gas production at the enterprises of the state company KazMunayGas did not stop during the unrest, oil production was reduced by foreign companies operating in Kazakhstan and joint ventures.

From October 2021, commercial oil inventories in the US and other OECD countries began to decline, and by December they were already 243 million barrels below the average for the past five years, which also contributed to the growth in prices for black gold. 

Nevertheless, both the Inteational Energy Agency and OPEC believe that in 2022 there may be a supply surplus in the oil market, which will be largely facilitated by the growth of oil production in the United States, as well as in Canada and Brazil, which do not participate in OPEC+. In 2022, demand growth is expected to be slightly less than in 2021, with demand estimated to increase by only 3.3 million b/d, according to the agency.

World oil reserves

In 2021, non-OPEC+ oil production is expected to increase by a total of 1.8 million barrels, of which 1.1 million barrels will come from US shale oil production. And the growth of world oil production, according to the forecasts of the agency, will be able to reduce prices.

In early January, the ministers of the OPEC+ member countries at a regular meeting agreed to extend the existing oil production quotas, which implies an increase in oil production in February by another 400,000 bpd. This decision was primarily because OPEC + does not believe that the new Omicron strain is capable of greatly undermining oil demand at the beginning of 2022, however, they do not exclude the possibility of an oil surplus in the first half of 2022, and in this case, the oil alliance will act according to circumstances.

Earlier, WHO Director-General Tedros Ghebreyesus said that Omicron, according to the organization, is less dangerous to humanity than previous strains of Covid-19, although this does not mean that it does not pose a danger at all. Oil prices in the first week of the new 2022 reacted with growth to the OPEC + decision and the calming statements of the WHO leadership. 

In general, in 2021, Russia increased oil production by 2.2%, to 524.05 million tons. And in December 2021, although Russia increased oil production in annual terms by 8.4% to 46.11 million tons, but was able to meet the quota for increasing oil production set for it by OPEC+ for December, only by 96%. This was partly due to the consequences of the coronavirus pandemic, which negatively affected the demand of consumers of Russian oil and pre-New Year lockdowns in some European countries.

Product Markets and Refining Operations

The total volume of oil refining in China from January to November amounted to 614.41 million tons, or 13.39 million barrels per day, and increased by 3.1% compared to the same period last year. The country processed 58.35 million tons of oil last month, equivalent to 14.2 million barrels per day, according to the National Bureau of Statistics (NBS). The figure exceeded the historical record of 14.09 million barrels per day reached in October.

The new record became possible due to the commissioning of new capacities of a private oil refinery. For example, in early November, Zhejiang Petrochemical Corp launched an oil refinery with a capacity of 200,000 barrels per day, in addition to the existing capacity of 400,000 barrels per day in easte China.

Meanwhile, back in November, Bloomberg predicted that China would soon take the world's first place in oil refining from the United States. America has been the undisputed leader in this sector since the beginning of the oil era. However, in 2021, China will take this position. The change of leader will occur, among other things, since four refineries are currently being built in China. US refineries, on the other hand, are shutting down. 

Tanker market

Spot freight rates for Aframax and Suezmax class tankers, after a long decline since mid-2020, rebounded from the minimum levels in October and began to grow, the upward movement will continue in the fourth quarter, investment bank analysts and market participants believe.

The average spot freight rate for Aframax-type tankers in September was at the level of $4,000 per day, at the end of October the rates soared to $14,000 per day. Freight rates for Suezmax-type tankers in September amounted to $4.6 thousand per day, in October they increased to $15.8 thousand per day. According to Clarksons, as of November 5, average freight rates on the spot market for Aframax tankers rose to $14,168 thousand per day.

The increase in spot freight rates at the beginning of the fourth quarter was driven by an increase in deliveries by OPEC+ countries against the backdrop of a recovery in oil demand, which was somewhat weakened due to the spread of a new delta strain. The current global energy crisis and rising gas and coal prices will boost oil demand in the coming months.  

According to market participants, the low level of orders for the construction of a new fleet and a large percentage of the recycling of old ships also contribute to the continuation of the trend of recovery in spot freight rates.

The portfolio of orders for new vessels also declined in the third quarter. During the first half of the year, shipowners placed orders for the construction of tankers with a total volume of 17.2 million tons. In the third quarter, the pace of orders slowed down significantly. During this period, contracts were signed for the construction of tankers with a total volume of only 0.8 million tons, which is the lowest figure since the second quarter of 2009.

Crude and Refined Oil Products Trade

At the end of November 2021, oil prices collapsed by 20% in one trade due to fears that the latest version of COVID-19 will weaken demand and, accordingly, limit the volume of shipments of oil and oil products. The upside of falling crude oil prices is that it could spur a surge in Chinese purchases, which will benefit owners of large tankers.

In the second half of 2021, the world's largest importer of black gold reduced exteal purchases and relied on domestic stocks. Amid the highest prices in seven years, China's crude oil imports fell 13.8% year-on-year from July to September.

The Delta coronavirus variant has already been behind sluggish global demand for jet fuel, which has lagged the recovery seen for other transportation fuels, with all transportation fuels collectively accounting for about 62% of oil consumption. In its November monthly report, the Inteational Energy Agency (IEA) lowered forecasts for jet fuel and kerosene, noting that by the end of 2022 demand for it will still be 20% below pre-coronavirus levels.

The Omicron variant would reduce demand growth by 3.5 mb/d. (b/s), which was originally projected by the IEA. But even without these changes, the total of 99.6 million b/d is still about 300,000 b/d below pre-pandemic levels. The trajectory of oil prices, the speed with which OPEC brings further oil production back to the market, refinery margins and nuclear talks with Iran will also affect the volumes of crude oil and oil products available for tanker transportation. 

Commercial stock shiftings

For the stock market of most of the largest inteational oil and energy giants, 2021 has been a very successful year. The most profitable investments in the stock market in 2021 were the shares of ConocoPhillips, which rose in price by 82% over the year, Gazprom Neft (growth by 70% over the year), and ExxonMobil (growth by 47%). The top five most profitable oil stocks in 2021 also included Chevron shares (up 39%).

The rapid growth of ConocoPhillips shares was primarily associated with the completion in early 2021 of the acquisition of the American shale company Concho Resources and the consolidation of its financial results in the financial statements of the inteational oil giant, while the high profitability of Gazprom Neft shares was caused by the successful sale of a 50% stake in the capital to LUKOIL subsidiary, as well as work on large projects in the field of capturing CO2 emissions and green energy. 

Equilibrium of Supply and Demand

The Energy Information Administration (EIA) of the US Department of Energy predicts that oil production will fully recover to 2019 levels only in the second quarter of 2022. By the end of 2022, demand should be expected to recover at pre-pandemic levels - about 100 million b/d. It is expected that in the 1st quarter of 2022 the average price of Brent oil will be about $75 per 1 barrel, by the 4th quarter it will drop to $70 per 1 barrel. This article does not constitute investment advice.


Author: Apostol Dmitry Evgenievich (ADE)

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