Oil market likely to ease in 2022

Crude oil prices fell on weaker sentiment with stronger US dollar and uncertain oil demand outlooks amid a new wave of coronavirus disease (COVID-19) cases in many countries, which is also affecting mobility across China.

Oil prices declined after the Energy Information Administration weekly report showed US crude oil stocks rose more than expected last week to their highest level since last August, which eased concerns about a tightening oil market.

US crude oil stocks rose 3.3 million barrels to 434.1 million barrels according to EIA data for the week ending on Oct. 29. Projections of higher oil supply in December also contributed to easing worries about a tightening global oil market.

The previous rally in crude prices stalled last week as upward pressure from a gas-to-oil switch eased on the downward correction of gas prices in major hubs.

The rise of oil prices was also capped by an announcement that China will release diesel and gasoline from state reserves, weakening manufacturing PMI in China in October that weighed on market sentiment, projections of higher crude oil supply in December, and a build in US crude oil stocks.

OPEC+ did exactly as expected and ratified an increase of 400,000 barrels per day for December, showing again its supply increase plan is well studied and reviewed on a monthly basis to ensure transparency and is reflective of market development with expectations that imbalance would again develop in 2022.

Rising COVID-19 cases in some European countries and major provinces in China might create bearish economic prospects, in turn affecting the oil market in the short term

Mohammed Al-Shatti

This policy has added to the market some 2 million barrels since August 2021, when its increase in production took effect. After OPEC+ decided to keep its supply policy intact, prices dropped to cater for expectations that US and China will be intervening in the physical market, including by tapping into their strategic crude reserves. Energy crunch-induced upside to demand from power generation due to gas-to-oil switching and direct heating demand for liquefied petroleum gas and gasoil could be countered by high energy prices and rationing of energy supply.

Overall, coupled with a sharp decline in coal prices driven by government directives in China and high liquefied natural gas inventories in the rest of Asia, the market sentiment appears to have turned bearish in the near term, with all eyes on November temperatures and developments in Russia-Europe trade flows.

The weakness at the bottom section of the barrel as well as strong feedstock prices weighed on Asian refining economics.

In addition, US crude production has been slow to recover from declines seen in 2020. At the end of 2019, the US was producing roughly 13 million barrels per day, but in recent weeks, output has been less than 11.5 million barrels per day. Rising COVID-19 cases in some European countries and major provinces in China might create bearish economic prospects, in turn affecting the oil market in the short term.

China’s recent announcement that it would hold a domestic auction of gasoil and gasoline from strategic oil product stocks highlights policy measures being taken to alleviate high-energy costs over the winter season. In India, the latest data for  September shows higher refinery utilization rates and declining gasoline exports, pointing to a healthy recovery in demand, as the economy picks up following the easing of lockdown measures.

While the market is tight for now, the situation might ease as we enter into 2022 and inventories start to build up once again, especially if the winter does not prove to be severe and demand is negatively impacted by possible lockdown in several countries where virus infections are rising again.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.