Crude Outburst

There was an attempt to temper the rising oil price during the quarter as the US led the release of strategic oil reserves alongside China (in a subsequent announcement), India, South Korea, Japan and Britain.

Whether this was a concerted attempt to ward off rising energy prices that are contributing so much to the rising inflationary pressure or whether it was more a political sop to shore up the rapidly declining approval ratings as Joe Biden faces the displeasure of US voters watching prices rise, one has to conclude the action in itself is driven by more of the latter.

Looking under the bonnet, the announcement confirmed the release of fewer barrels than anticipated in the lead up to it as markets had anticipated c100m barrels being released, rather than the 65m or so that was announced. The release will come into the market in the coming months so is unlikely to alter the immediate price outlook. Further, with any barrels released from strategic reserves being required to be bought back and returned to those reserves, the act itself could in fact help underpin the future oil price.

On the supply side of the equation, the leaders of OPEC+ are unlikely to be overly concerned, nor rush to turn the taps on as to what amounts to the release of less than a day’s worth of global demand. For their part, OPEC+ are gradually increasing supply in the face of strong demand but will no doubt be eyeing warily the Covid situation and be cautious about ramping up supply in the near term when question marks could be raised about further lockdowns dampening economic activity.

The price of oil rose in the wake of the announcement but OPEC+ did confirm they would proceed with their planned monthly production increase of 400,000 barrels from January 2022. As activity subsides in the face of a rising number of Covid restrictions, some near term relief in the oil price has emerged but this will dissipate as we move through the year and activity returns. The outlook for the oil price for 2022 can be summarised as:

  • The ‘bulls’ would point to the continued growing demand for oil as economies recover in an environment where global oil production is only steadily rebuilding from its 2020 lows as the positive impetus required for the oil price to continue to push higher. Couple this with OPEC+ members maintaining their supply discipline and US energy firms showing significant capital restraint leaving limited US options to increase supply then this augurs well for ‘black gold’.
  • The ‘bears’ would point to continued weaker economic activity driven by Covid disruption as helping to keep a lid on prices in the early part of 2022. Combine this with the global rebuilding of oil inventories during the year and add in the potential for US oil sanctions relief to open up the flow of Iranian oil during the latter half of the year and the outlook points to a general weakening of the oil price.

At the time of writing just before Christmas, oil markets are more sanguine with spot prices in futures contracts for Brent delivery shallowly falling through 2022 towards the mid $60’s by December 2022.

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