Despite higher prices, the oil market faces challenges

Crude prices rose, supported by expectations of strengthening oil market fundamentals in the near term. A decline in the value of the US Dollar and an increase in speculative net length added support.

Investors remain optimistic about the outlook for oil fundamentals. Investors are betting on a tighter oil market amid supply constraints in several regions and sharp declines in U.S. crude inventories to their lowest level since October 2018.

Meanwhile, market confidence has improved amid signs of a slight impact on global oil demand following the recent global surge in COVID-19 cases.

China’s annual crude oil imports fell to 10.3 million barrels per day (bpd) in 2021, falling for the first time since 2001, as Beijing clamped down on the refining sector to limit excess domestic fuel production while refiners reduced their massive inventories. Imports will increase as throughput recovers after the event. Imports for the whole year will average 10.5 million bpd.

Rough imports in Asia are expected to decline in 2021 due to inventory drawdowns from high levels built a year earlier and a weaker-than-expected demand recovery caused by a resurgence of the COVID-19 pandemic. . Imports will increase in 2022 thanks to the recovery in demand in the context of a continued decline in crude production.

The majority of crude inflow growth will likely come from the Middle East. Indian demand for petroleum products in December was down, dragged down by minor products such as LPG, naphtha, fuel oil and asphalt. India’s daily new COVID-19 cases averaged 173,000 over the past week, down from around 8,000 in the same period a month ago.

Infections in cities like Delhi and Mumbai have already passed the delta peak in April 2021. India has already vaccinated 900 million people with at least one dose, and 644 million people have already been fully vaccinated.

Overall, global oil markets in the second quarter of 2022 are expected to be in a delicate balance and should move into a structural surplus.

Mohammad Al-Shatti

The Indian government has not resorted to draconian restrictions such as shutdowns, but states have imposed some restrictions such as night curfews and reduced office occupancy, resulting in reduced mobility. Environmental restrictions ahead of the Beijing Winter Olympics, as well as the risk of lower fuel consumption levels due to rising COVID-19 cases, mainly in India and China, could lead to pressure on Asian product markets in the short term, if containment measures are reinstated.

A recent drop in airline capacity affected by COVID-19-related travel restrictions, if continued, is expected to weigh on jet fuel markets and lower margins for the product, compared to its strong performance in December.

With US inflation, an interest rate hike by the Federal Reserve is now more likely in March. This may create volatility in the oil market at a time when Omicron is affecting US growth in the first quarter of the year.

US Gulf Coast refinery margins increased, supported by strong domestic fuel demand from the manufacturing sector as well as firm diesel and heating oil exports. In Europe, margins were impacted by higher product production and signs of a significant recovery in product inventories. Meanwhile, Singapore’s margins were supported by higher diesel needs for road transport and power generation.

Some industries expect a limited volume of additional Iranian oil exports to come into effect from the second quarter of 2022, with total volumes increasing by 1.4 to 1.5 million bpd by the second quarter. semester of the year. If the current negotiations are so successful, it will certainly affect the prices.

Libyan crude supply topped 900,000 bpd on Jan. 13, and crude production is expected to hit 1.1 million bpd soon after weather-related shutdowns end. Kazakh production is likely back to or close to full capacity, after public unrest last week appeared to ease.

Looking at the 2022 balances, OPEC+ may continue to add more oil in the next two months, but in excess in the first half; the market does not seem to need more oil this year. Omicron’s dampening threat to oil demand and resulting expectations of a pickup in demand growth bring concerns over OPEC+ spare capacity back to the forefront of market discussions .

While commodity prices have risen sharply in 2021, little has been done to address market imbalances by either destroying demand or increasing supply. In fact, real estate concerns from omicron and China have done more to discourage capital flows into commodity investments than to hurt global demand.

Rising prices have struck a delicate balance in Europe. The transition from gas to coal, the reduction in industrial demand, the strong production from the North Sea and the increase in LNG imports have compensated for the drop in Russian supply. The main risks include colder weather, further disruptions in Russian supply or an increase in Asian demand for LNG. While prices are expected to decline as storage inventories normalize, tail risks are still tilted to the upside due to low inventory levels.

The price spike came as concerns about demand eased and Chinese authorities reportedly push for a more aggressive infrastructure plan to stabilize the economy. However, supply disruptions due to extreme weather are easing in the United States and Ecuador, while oil production in Libya, Nigeria and Kazakhstan’s Tengiz field is rebounding after protests temporarily halted. the operations. Additionally, Brazil and Canada are expected to increase volumes as maintenance eases. Overall, global oil markets in the second quarter of 2022 are expected to be in a delicate balance and should move into a structural surplus.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.

Disclaimer: The opinions expressed by the authors in this section are their own and do not necessarily reflect the views of Arab News