As expected, OPEC stuck to its plan of gradual increases at the December meeting, but left its options open by failing to adjourn the meeting. This allows the group, if necessary to make inter-meeting adjustments, or even for individual members to unilaterally decide to make adjustments. Ultimately, oil is likely to remain in the current range until there is clarity about the response to the Covid19.
OPEC is likely to stay on standby, maintaining its planned production as it continues to be concerned about final demand. The policy response to Omicron has reinforced the 2022 demand concerns OPEC+ members have had for some time which is set to weaken, along seasonal lines in early 2022. They are likely to hold off on major decisions for now. Along the way, if oil prices stay well below $70, we could see major producers like Saudi Arabia choosing not to add as much.
Meanwhile planned SPR releases, while relatively small in volume have only added to uncertainty. After announcing planned increases, the US has now conditioned the pledge on the price of oil, reinforcing concerns that the decision was not based on a fundamental shortage or a particular fundamental outlook. Importers clearly have a desire to “do something” about higher prices, and the recently announced SPR release was part of this trend.
The fundamental outlook remains highly contingent on the path of covid19 fight and the mitigation policies used. This time, despite travel bans, broad lockdowns seem unlikely meaning that for much of the global economy individual choices not national shutdowns will moderate demand growth. The current policy trajectory will add to supply chain backlogs and vulnerabilities as key countries cling to covid zero targets. It will put off the shift to in-person services and dampen consumption as goods prices remain high.
We aren’t likely going back to 2020 given political and economic costs of full lockdowns, but marginal demand and travel and demand for in-person services is likely to remain weak.
The higher fuel costs, not just oil but natural gas, have been dampening growth, especially in agriculture. This trend has weakened the fundamental outlook further, increased risks for global growth due to monetary tightening. This risks further price swings later in the year.
Beyond the demand concerns, OPEC+ is somewhat constrained on the supply side as only a few of its members have actual spare capacity to provide – these include Saudi Arabia, UAE, Russia. Russia in particular is likely to have less spare capacity than some expect – note their reluctance to increase natural gas prices as global demand spiked. Meanwhile the political dynamics in OPEC mean that all countries are looking to maintain and in many cases grow their share of the pie in years to come. This means that any agreement has to balance the realistic and less realistic production increases.
Iran talks remain on the radar – though at present the chance of broad sanctions relief/return to JCPOA/investment prospects look far off given the Iranian maximalist demands and the the US sequencing concerns. A significant expansion of Iranian production, phased in over several quarters, would be a surprise to global markets at this point.
Meanwhile, the big question remains around US production, which has been slow to pick up despite the summer/fall price rally. Much of the increased production comes from already producing areas, rather than new drilling. Under this price environment, new US production is unlikely, which will pose major challenges over the coming years.
Overall, we’re in for a continued rocky ride on the oil market as both OPEC+ and US-led importers are increasingly trying to manage/steer market. Ultimately this reflects the uncertainty about global growth, which reflects both Covid pathway and mitigating policies.
Ziemba Insights 