Oil prices continue to please the bulls, rising to multi-year highs as a result of tighter-than-expected supplies.
The reason prices are reaching multi-year highs is the unexpected product gap the market is facing, as the theme so far for 2022 is that the oil market is short of the oil supply it anticipated for the beginning of 2021.
According to Rystad Energy analysts, unplanned outages this month have flipped what was thought to be a pivot towards surplus into a deep production gap.
Unplanned outages in Libya, Ecuador, and Kazakhstan, coupled with downgrades to US, Russia, and Brazil forecasts, together result in 1 million bpd lower supply this month than previously forecasted.
On top of the tighter supply market, the geopolitical standoff between the US and Russia risks a gas war and would spur incremental demand for heating oil, and also seems to diminish the prospects of an Iran nuclear deal, and with it the return of some 1 million bpd to the market.
Underperformance by OPEC+ is also supportive to prices, as not all planned supply by the group is yet online.
Demand, though experiencing a seasonal dip, is still holding up well despite the “fear” of larger Omicron impacts on transport, which has so far not materialized.
Real-time data shows a post-Christmas impact, which can be assigned to both Omicron restrictions that have resulted in cancelled flights and long at-home isolation periods, as well as the general downward seasonal trend in January.
Despite the mild impact, it may be still too early to “blow the demand horn” on Omicron, especially as some countries are at risk of reaching their Intensive Care Unit (ICU) capacities, which could lead to new restrictions.
Even if supply issues are patched up, there is still the larger threat of supply chain delays, a lack of supply in labour markets, and overall cost inflation on lifting oil from the ground after costly shut-ins from 2020.
Also published on Medium.
