Factors likely to influence global oil prices this year
Wednesday January 05 2022
In the second half of 2021, oil prices were a critical socio-economic topic globally and even here in Kenya. Oil prices increased as the world was coming out of a prolonged period of low prices that stretched from 2014 when prices dropped from above $100 per barrel to as low as $25, caused by a global oil glut.
In 2020, the Covid pandemic had further depressed prices as oil demands came under attack from a Covid pandemic. From mid-2021 prices suddenly recovered as oil demands rebound in a world becoming resilient to Covid.
The Organisation of Petroleum Exporting Countries (Opec) and its allies were simultaneously controlling oil production to match recovered demands, while averting a repeat price collapse.
This year has opened with oil prices fluctuating in the wide range of $70-80, with daily peaks and troughs influenced mainly by traders and hedge fund players, who mostly ‘talk up’ prices at the slightest sign of changes in oil market environment, to maximise opportunities.
Step-changes in oil price ranges will, however be affected by factors significantly influenced the age-old demand/supply/price algorithm. High demands strengthen prices, while over-supply destroys prices I will here below analyse factors that are likely to influence prices in 2022.
With all respects to COP29, it is the global oil demands trajectory that will influence how much oil is produced. As long as global economies are growing the key oil products ( gasoline,diesel, kerosene, jet fuels ) will continue to rise.
This demand can only reduce when these products are significantly replaced by energy transition technologies, mainly by electrified transportation (road, rail, air, marine) or other alternatives. Until this transition takes place sufficiently, the world will continue to produce as much oil as global economies request.
For clarification, most of the renewable energy (wind, solar, nuclear) goes into grids to replacecoal and natural gas in power generation, industrial and domestic heating where oil is not a major player.
Over time, electricity from renewable energy will find its way into transport electrification. Therefore, as long as global economies are growing, oil demand will continue to rise, and will call for more oil production in 2022 and through this decade.
As for Covid 19, experts seem to accept that humans are now better experienced, equipped and resilient to future Covid upsurges. This optimism, if it holds, will continue to support increased oil demands and higher prices through 2022 and beyond.
Turning to supply, this is where we can expect surprises as oil production can go either way. Since 2014 price collapse, many oil companies have essentially underinvested in oil production with most cautiously preparing for energy transition from oil to new renewable technologies. If this transition is slow and oil demands growth persists, there is likely to be shortages of oil.
However, it is expected that a few oil producing countries will have sufficient production spare capacity to fill in supply deficits by private investors. It is also expected that US shale oil producers will step up production as long as soaring prices persist.
There are also the prospects of revived oil production from Iran should the ongoing talks on nuclear treaty close out positively. More oil could also come out of revived production from Venezuela, and Libya which are OPpec members. More oil is also expected from the new prolific offshore Guyana oilfields belonging to an ExxonMobil led consortium.
It is evident that in 2022 and in the shorter to medium term there will be more than enough oil to meet net oil demands which will be growing after considering demand attrition caused by electrification of transportation.
Responsible production competition among oil producing countries will ensure prices are protected above $70 by avoiding price-damaging oversupply. They are also likely to ensure that prices do not go above US$80 as this would weaken global economies while destroying oil demands .
The above analysis can of course be thrown into disarray by a major geopolitical/economic upset or even a stubborn Covid virus that refuses to give up. Speculators will, as always, continue to create panic scenarios that drive short-term price changes, despite there being no physical shortage of oil molecules around the world.