Oil market remains uncertain amid COVID variant

Nevertheless, the global oil market is still facing a high degree of uncertainty amid the evolution of the COVID-19 pandemic. At the time of writing, downside risks reappeared on the demand side due to the emergence of the Omicron variant and the surge in new COVID-19 cases.

The emergence of the Omicron variant at the end of November 2021 triggered a sharp sell-off in oil. The front-month futures price for Brent crude oil decreased by $9.5/bbl, or nearly 12%, on November 26. Many countries have reimplemented movement restrictions and other guidelines.

Although the new variant adds downside risks to the outlook, we remain cautious about the extent of the negative impact on oil demand. It is expected that the new wave will slow but not reverse the ongoing demand recovery. Oil demand in 2022 will continue to return to the level before the pandemic.

Meantime, oil supply is increasing. Production cuts of OPEC and its alliance (OPEC+) are being steadily lifted on a monthly basis. Supply growth from non-OPEC+ countries is also accelerating. The US, Canada, Brazil, the North Sea and Guyana are all set to increase production in 2022. Near-term supply has also come from strategic petroleum reserves (SPRs).

As the upward supply trend continues into 2022, and if the remaining OPEC+ cuts are fully unwound, global supply could soar as much as 6.4 million b/d in 2022, compared to an increase of 1.5 million b/d in 2021, according to the latest assessment of the International Energy Agency (IEA).

The increase in supply and the easing of demand have greatly loosened the balance. With strong supply growth, the market in 2022 will likely turn to excess from a deficit in 2021.

Global economy, oil demand

Global economic growth is set to hit 5.6% in 2021 before moderating to 4.5% in 2022 and 3.2% in 2023, the Organization for Economic Cooperation and Development (OECD) said in its latest economic outlook released in early December 2021.

Economic growth, although losing momentum in many economies due to inflation and supply-chain issues, should support a continued recovery in oil demand going forward. The recent emergence of Omicron variant has nevertheless increased the uncertainty of the global economic outlook and oil demand.

“The failure to ensure rapid and effective vaccination everywhere is proving costly with uncertainty remaining high due to the continued emergence of new variants of the virus,” the outlook noted.

IEA’s latest demand forecasts for 2021 and 2022 were both revised downward by 100,000 b/d from the previous ones as the new containment measures implemented to stop the spread of the Omicron variant are having a direct impact on air travel and jet fuel consumption. However, in countries where most of the population is vaccinated, the new travel restrictions should be milder than in previous waves, IEA noted.

Global oil demand rose by 5.36 million b/d year-on-year (y-o-y) to 96.19 million b/d in 2021, according to the latest IEA estimates. Oil demand in 2021 was marked by a 2.49 million b/d growth in OECD countries, and a 2.88 million b/d increase in non-OECD countries.

IEA’s current demand forecast for 2022, calls for further growth of 3.34 million b/d. Demand growth is expected to slow in first-quarter 2022 as various governments impose increased travel restrictions in response to the Omicron variant. Quarterly growth could recover in 2022’s second and third quarters. Overall, global oil consumption is expected to average 99.53 million b/d in 2022, returning to pre-pandemic levels.

Total OECD demand is expected to rise by 1.62 million b/d this year. Demand in OECD Americas will increase by 880,000 b/d, or 3.64%, following a 1.73 million b/d expansion in 2021. OECD European oil demand will increase 4.09% (+530,000 b/d) to 13.48 million b/d. Demand in Japan will increase by 120,000 b/d from a year ago.

Non-OECD oil demand will increase by 1.73 million b/d this year, following a 2.88 million b/d growth in 2021. On an annual basis, non-OECD oil demand in 2022 will reach 1.6 million b/d above 2019.

China’s oil demand is expected to grow around 500,000 b/d in 2022, down from 1.17 million b/d in 2021. With the government’s efforts to cool the real estate industry, coupled with policy-induced power outages and the outbreak of COVID, China’s oil demand is headed towards a soft start in 2022.

By product category, jet/kerosene demand is expected to increase 20% in 2022, assuming the demand is becoming more normalized during this year. However, jet/kerosene demand for 2022 will remain 20% lower than the 2019 level. Motor gasoline demand and distillate demand in 2022 are expected to recover to the 2019 baseline levels. LPG, ethane, and naphtha will continue the growth trend in 2022, thanks to new petrochemical start-ups around the world.

Global oil supply

In 2020, OPEC and its non-OPEC alliance reduced production by a record of 9.7 million b/d to cope with the collapse in oil demand. In April 2021, with the improvement of oil demand and the reduction of global oversupply, OPEC+ returned 2.1 million b/d of supply to the market from May to July. In July 2021, OPEC+ continued to reduce production by 400,000 b/d on a monthly basis starting in August 2021.

OPEC+ production returns based on the set monthly increments. However, output has remained below the overall target, as some producers are struggling to increase their production due to operational and technical issues, lack of investment and high natural decline rates. These producers include Nigeria, Angola, Malaysia, and Azerbaijan.

Iran and Libya, both exempt from official OPEC+ cuts, are the prominent supply wildcards. Their movements may be a key change in market dynamics.

Buoyed by the formation of the interim Government of National Unity, Libya’s crude oil production surged to around 1.2 million b/d in 2021 from 350,000 b/d in 2020.

Iran’s crude oil supply surged by 21% in 2021 to an estimated 2.4 million b/d. If sanctions are eased, Iran will be able to ramp up towards a sustainable crude production capacity of 3.8 million b/d.

Total OPEC crude supply in 2021 averaged 26.4 million b/d, compared with 25.7 million b/d in 2020. OGJ forecasts OPEC crude oil production will average 30.3 million b/d in 2022.

Non-OPEC supply remains concentrated in a few countries. Due to unplanned power outages and low investment, growth in 2021 was milder-than-expected. However, non-OPEC supply growth is expected to accelerate in 2022, with US accounting for most of the gains.

As part of the OPEC+ group, Russia’s total oil production, including crude oil, condensate and NGL, averaged 10.87 million b/d in 2021, up from the year-ago level of 10.6 million b/d. Current OPEC+ plans allow Russia to increase its supply by slightly more than 100,000 b/d each month.

US production is forecast to rise 5.5% in 2022 to an average of 11.8 million b/d. US shale production has started resuming across all basins, with growth mainly concentrated in the Permian.

Canada’s offshore sector in 2021 saw the first annual decline in 6 years. Nevertheless, Canadian oil supply is estimated to have increased 5.6% in 2021 to 5.65 million b/d, supported by higher oil prices and new takeaway capacity. Canadian oil production in 2022 is expected to be 220,000 b/d higher than 2021 and above the pre-pandemic level on an annual basis.

Brazil’s oil production decreased from 3.04 million b/d in 2020 to 3.01 million b/d in 2021, due to recurrent disruptions caused by COVID-19 operational challenges. The country’s production is expected to grow to 3.19 million b/d in 2022. Petrobras unveiled their annual strategic plan in late November, outlining plans for $8.8 billion of upstream investments in 2022 and an oil production target of 2.1 million b/d.

Norway’s total oil production was up from 2.01 million b/d in 2020 to 2.06 million b/d in 2021, an increase of 2.49%. The country’s production is expected to rise to 2.11 million b/d in 2022, up 2.43%. A number of small projects will come online in 2022. The second phase of Johan Sverdrup will be commissioned in 2022 fourth quarter, raising the capacity of the field from 535,000 b/d to 755,000 b/d.

China’s total oil production was up from 3.97 million b/d in 2020 to 4.07 million b/d in 2021, a growth of 2.52%, thanks to strong investments. The country’s production is expected to increase to 4.09 million b/d in 2022.

Oil stocks

OECD inventories have tightened continuously since peaking in July 2020. At the end of October 2021, OECD industry inventories reached 2,737 million bbl, 243 million bbl below the 5-year average for 2016-2020. Preliminary data for November 2021 showed that industry inventories fell again by approximately 23 million bbl. For the whole of 2021, OECD inventories fell by about 1 million b/d on average.

In 2022, OGJ expects the large declines in stocks to begin ebbing as supply returns. According to OGJ’s forecast of OPEC’s crude oil production, coupled with IEA’s forecast of demand and non-OPEC supply, global oil inventories are expected to increase by 2.8 million b/d this year.

US economy, oil demand

The Conference Board forecasts that the US economy will grow by 3.5% in 2022 and 2.9% in 2023, following a growth of 5.6% in 2021. The emergence of the Omicron variant led to a downgrade for the growth in 2022 first quarter. Persistently high inflation and a more hawkish Federal Reserve will also create headwinds in the outlook.

US oil consumption averaged about 19.75 million b/d in 2021, up 8.7% from 2020, according to the latest data of the US Energy Information Administration (EIA). Consumption in 2021 remained lower than the 2019 level of 20.5 million b/d.

Motor gasoline consumption in 2021 averaged 8.79 million b/d, an increase of 9.2% from a year ago. According to data from the Federal Highway Administration, the vehicle mileage (VMT) in the first 9 months of 2021 was approximately 11.7% higher than the same period in 2020.

 OGJ expects that VMT in 2022 will be close to the 2019 level. However, factors including improved fuel efficiency, more working from home, will likely limit the growth of gasoline demand. OGJ predicts that gasoline consumption will average around 9 million b/d in 2022.

US distillate consumption averaged 3.97 million b/d in 2021, up 4.9% from a year ago. According to data from US Bureau of Transportation Statistics, trucking freight, as measured by the truck tonnage index, indicated an increase of 0.1% in 2021. OGJ expects that distillate fuel consumption for 2022 will increase by about 3% y-o-y and return to the 2019 level.

US jet fuel consumption climbed by an estimated 300,000 b/d (+28%) in 2021 from its 2020 low, reaching 1.4 million b/d. However, jet fuel consumption has been well below its 2019 average of 1.74 million b/d since the onset of the pandemic. Jet fuel consumption is expected to continue catching up in 2022. OGJ expects that US jet fuel consumption will increase by 220,000 b/d (+16%) to 1.6 million b/d in 2022, 8% lower than the 2019 level.

OGJ expects that LPG and ethane demand will increase by 5.6% in 2022, following an increase of 5.57% in 2021. Almost all growth in 2021 and 2022 is attributable to increased use as petrochemical feedstocks. More ethane cracking capacity will come online in coming years.

OGJ forecasts that total US petroleum and other liquid fuels consumption will average 20.5 million b/d in 2022, a growth of 3.8% from 2021.

US oil production

Following the hit by Hurricane Ida, US crude supply is estimated to have averaged 11.18 million b/d in 2021, a decline of 100,000 b/d from 2020. However, thanks to strong NGL production, US total oil production for 2021 was 100,000 b/d higher than the year-ago level.

Higher oil prices and continued well and other efficiencies are unlocking increased flows from the US shale patch, especially in the Permian.

Baker Hughes’ data show that US oil rig count is steadily increasing. At the beginning of December 2021, US oil rig count stood at 467, an increase of 69% from the beginning of the year and almost twice the amount of a year ago. Nevertheless, based on the historical relationship between WTI spot prices and onshore rigs, the gain looks modest.

Permian recorded the biggest gain. Oil rig count in Permian increased to 283 in early December 2021 from a low of 116 in August 2020. Technology innovations, such as longer lateral wells and multi-well pad drilling, has helped reduce costs and increase productivity.

Noticeably, private E&P companies are increasing their drilling efforts. According to IHS Markit, private E&Ps now account for about half of the number of onshore oil and gas rigs in the US, up from 35% before the pandemic.

In comparison, independent E&Ps account for 40% of the number of rigs, but the current count of rigs in operation decreased by 45% compared to the fourth quarter of 2019. Global majors account for only 6% of the total rigs, compared to 18% before the COVID, due to divestment and capital reallocation.

As drilling activity accelerates, operators are rapidly working through the backlog of drilled but uncompleted (DUC) wells. DUCs decreased from 7,989 in November 2020 to 5,104 in November 2021, according to EIA’s Drilling Productivity Report.

However, the recent earnings season displayed that, to meet shareholder expectations, companies are continuing to signal capital restraint and have committed to dividend increases, buy-back programs, and increased debt repayment. Additionally, those that announced preliminary 2022 budgets anticipate modest rises in spending, emphasizing efficiency gains.

Production of the Gulf of Mexico averaged 1.71 million b/d in 2021, up 4.27%from a year ago. The Gulf of Mexico is expected to see further production growth in 2022, driven by new projects coming online.

Overall, OGJ forecasts US crude oil production to average 11.85 million b/d in 2022. NGL production will increase to 5.84 million b/d in 2022 from 5.38 million b/d in 2021.

US refining

In 2020, the decline in the throughput of US refineries was almost the same as the decline in demand, about 2.3 million b/d. In 2021, US refining runs was driven up by the recovery in demand for petroleum products, particularly gasoline and distillate. However, US refinery production has lagged the recovery in demand, which only partly alleviated tight refined product markets. Moreover, cold weather in February and Hurricane Ida in August led to temporary refinery shutdowns in the Gulf Coast region.

US gross inputs to refineries averaged 15.67 million b/d in 2021, up from 14.72 million b/d in 2020. However, this level was still below the pre-pandemic level of 16.99 million b/d in 2019. Refinery utilization as a percentage of operable capacity averaged 86.5% in 2021, up from 78.9% in 2020 but below 90.3% in 2019.

Despite higher crude oil prices, refining margins were improved during 2021 on stronger product demand, higher cracks, and unexpected disruptions to refinery production. Meantime, US refiners have been enjoying a natural gas price advantage versus European and Asian operators.

According to Muse Stancil & Co., US refining cash margins for the first 11 months of 2021, the latest data available, averaged $15.89/bbl for the Midwest, $13.17/bbl for the West Coast, $8.37/bbl for the Gulf Coast, and $6.74/bbl for the East Coast. These compared to cash margins of $6.87/bbl, $7.12/bbl, $2.2/bbl and $1.02/bbl respectively a year ago. For the same period in 2019, these refining margins averaged $17/bbl, $15.02/bbl, $6.08/bbl, and $2.84/bbl.

The rise in Renewable Volume Obligation (RVO) costs has increasingly impacted refining margins of road fuel producers. The prices of renewable identification number (RIN) credits increased sharply in 2021. As RINs are built into US refining margins this resulted in an inflation of US margins.

In early December, the Environmental Protection Agency (EPA) announced its proposals concerning 2020-22 blending mandates. It lowered the 2020 mandate from previously set 20.1 billion gallons to 17.1 billion gallons. For 2021, the blending requirement was set at 18.5 billion gallons. The agency would also set the level for 2022 at about 20.8 billion gallons.

US refining capacity averaged 18.12 million b/d during 2021, down from 18.66 million b/d for 2020. US refining capacity had reached a record high of nearly 19 million b/cd earlier 2020, but several refineries have closed since then, and capacity fell to the lowest level since 2016. Meantime, more refineries announced plans to start or increase the production of renewable fuels.

In 2022, OGJ expects US refining activities to continue ramping up, driven by the ongoing recovery in product demand and exports.

US oil trade

Over the first 9 months of 2021, gross US crude oil exports averaged 2.9 million b/d, a decrease of 10.54% compared with the same period of 2020. This decrease was the first time exports decreased since the end of the export ban in 2015 and was driven by lower crude oil production.

The 2021 top destination of US crude exports was India. Over the first 9 months of the year, US crude exports to India averaged 410,000 b/d, up 73.42% over the same period in 2020.

Aside from India, US crude exports went mostly to Korea, Canada, and Netherlands. US crude exports to China during the first 9 months of 2021 averaged 230,000 b/d, down sharply from 450,000 b/d for the same period in 2020. In China, large state-owned refiners withheld purchases because of rising prices while independent refiners were restrained by limited quotas to import.

Gross US crude oil imports increased from 5.99 million b/d in the first 9 months of 2020 to 6.1 million b/d in the first 9 months of 2021, due to lower domestic production and higher refining demand. Crude oil imports from OPEC members averaged 766,000 b/d, down from 923,000 b/d in the first 9 months of 2020. The leading source of US crude imports was Canada, which supplied 3.7 million b/d over the same period.

With the ease of global lockdowns and increased mobility, US product exports also increased during 2021. Over the first 9 months of 2021, refined products exports averaged 5.53 million b/d, an increase of 5.03% compared with the same period of 2020 but an increase of 2% compared with the corresponding 2019 levels.

The top destination for US product exports was still Mexico. Over the first 9 months of 2021, US product exports to Mexico averaged 1.14 million b/d, up 15.22% over the same period in 2020. Aside Mexico, US product exports went mostly to Canada, Japan, and Brazil during 2021.

US motor gasoline exports averaged around 800,000 b/d, an increase of 16.6% compared with the same period of 2020. Mexico was the largest receiver for US gasoline exports, receiving nearly 57% of total US gasoline exports. US gasoline also exports went mostly to Brazil, Guatemala, and Colombia.

Distillate exports averaged 1.06 million b/d over the first 9 months of 2021, a decline of 13.8% compared with the same period of 2020. The top destination for US distillate exports was Mexico. US distillate exports also went mostly to Brazil, Chile, and Panama.

US HGL exports averaged 2.3 million b/d over the first 9 months of 2021, an increase of 13.77% compared with the same period of 2020. The top destination for US HGL exports was Japan. Over the first 9 months of 2021, US HGL exports to Japan averaged 390,000 b/d, down nearly 4% over the same period in 2020. Canada, China, and Mexico were other major US HGL export destinations.

US petroleum product imports surged in 2021, as US refinery production lagged behind demand recovery. In the first 9 months of 2021, US imported an average of 2.43 million b/d of petroleum products, a growth of 23.49% compared to the same period of 2020.

US oil stocks

During 2021, muted crude oil production growth and higher refining inputs, offsetting increased crude net oil imports, resulted in lower US crude oil stocks versus the year-ago levels. Crude inventories excluding the Strategic Petroleum Reserve (SPR) closed out 2021 at 426 million bbl, compared to 485 million bbl at yearend 2020.

Crude inventories in the SPR were 597 million bbl at yearend 2021, compared with 638 million bbl at yearend 2020. On November 23, the White House announced plans to make 50 million bbl of crude oil available to the market through a combination of exchanges and accelerating previously announced sales. With these sales and several other legislated drawdowns, SPR inventories could decline to about 314 million bbl by the start of the 2032 fiscal year, the lowest level since early 1983. The Infrastructure Investment and Jobs Act passed in late 2021 also includes a provision to draw down 87.6 million bbl of crude oil from SPR in fiscal years 2028 through 2031.

US refinery intake has lagged the recovery in demand. Moreover, Hurricanes along the Gulf Coast in August contributed to temporary refinery outages and reduced production. As a result, refined product stocks have drawn by nearly 200,000 b/d since the start of 2021.

Total petroleum product stocks stood at 781 million bbl at yearend 2021, down from 857 million bbl at yearend 2020. Motor gasoline inventories finished 2021 at 229 million bbl, compared to 243 million bbl at yearend 2020. Distillate fuel oil stocks moved to 131 million bbl from 161 million bbl at yearend 2020, and inventories of jet fuel oil finished 2021 at 35.8 million bbl, down from 38.6 million bbl at yearend 2020.

US natural gas

Henry Hub natural gas spot prices averaged $3.97/MMbtu in 2021, compared with $2.03/MMbtu in 2020 when gas consumption weighted by negative impacts of COVID-19 and warmer winter weather early that year.

After reaching 6.53 bcf/d in 2020, US LNG exports continued to hit a record high of 9.8 bcf/d in 2021. High LNG exports, combined with relatively stable US natural gas production, and lower storage levels, supported prices. The North America cold wave in February 2021 also pushed up natural gas prices during that period, thereby pushing up the annual average price.

In 2022, the average of US natural gas prices is expected to remain high above $3.9/MMbtu, driven by strong LNG exports. However, the rise in US natural gas production will limit upward pressure on natural gas prices.

Estimated US natural gas consumption averaged 83.5 bcf/d in 2021, up 0.3% from a year earlier, according to latest EIA data. OGJ forecasts that natural gas consumption in the US will drop by 0.5% in 2022, as the decline in gas consumption in the power generation sector offsets the increase in gas consumption in other sectors.

The power generation sector consumed 30.66 bcf/d in 2021, accounting for 36.68% of the total US natural gas consumption. In comparison, in 2020 it was 31.72 bcf/d, accounting for 38.08% of total consumption. The decline reflects the sharp increase in natural gas prices in 2021.

Gas consumption in the power generation sector is expected to decline further by 6% in 2022, reflecting continued high natural gas prices and the increasingly fierce competition from renewable energy sourced power generation.

In 2020, renewable energy sources generated about 19.5% of all the electricity generated in the US, becoming the second-most prevalent US electricity source. This ratio is expected to be 20% in 2021 and 22% and 2022, respectively. According to EIA data, average US construction cost for onshore wind generation has decreased by 27% since 2013.

On the weather side, the number of Heating degree days for this 2021-2022 winter, based on the most recent forecast from the National Oceanic and Atmospheric Administration (NOAA), are expected to be 0.5% less than last winter and 2% less than the 10-year average.

Industrial natural gas consumption in 2021 rose 1.5% from the 2020 level, averaging 22.6 bcf/d and accounting for 27% of total US natural gas consumption. The increase reflected increasing manufacturing activity during 2021. Industrial natural gas consumption will continue to increase by 3% in 2022.

Natural gas consumption in the residential and commercial sectors, grew 3.44% and 5.18% respectively, compared with their 2020 levels. Combinedly, these two types of consumptions accounted for 26.76% of the total gas consumption. Combined gas consumption of these two sectors is expected to increase 2.5% in 2022.

US natural gas production measured as marketed production and dry natural gas production were 101.08 bcf/d and 93.32 bcf/d in 2021, up 2.17% and 1.99% from a year earlier, respectively.

Spurred by higher gas prices and surging exports, US gas drilling activity began to rise since the last quarter of 2020. Compared with a low of 68 in July 2020, 102 active rigs were directed at drilling for natural gas as of early December 2021. Oil-directed activity also increase natural gas production because of associated natural gas recovered from rising oil production. Notably, US natural gas production in February 2021, when weather-related well freeze-offs contributed to production shut ins, recorded the largest monthly decline in history.

OGJ forecasts that US marketed gas production will increase 3% in 2022, supported by favorable commodity prices and strong exports.

US net gas exports in 2021 averaged 10.85 bcf/d, which compared with 7.47 bcf/d a year ago and was equivalent to 11.63% of total US dry gas production.

Estimated US LNG exports averaged 9.78 bcf/d in 2021, 49.8% higher from the 2020 level, and 96% higher from the 2019 level. Moreover, for the first time since US LNG exports from the Lower 48 states began in 2016, annual LNG exports outpaced pipeline exports—by an estimated 1.2 bcf/d. Continuous strong US LNG exports reflect greater demand in Asia and Europe, huge price spreads across the regions, and unplanned outages in several LNG exporting countries.

US LNG export capacity has grown rapidly since the Lower 48 states first began exporting LNG in February 2016. In 2020, US became the world’s third-largest LNG exporter, after Australia and Qatar. Once the new liquefaction units at Sabine Pass and Calcasieu Pass in Louisiana are put into service by the end of 2022, US will have the world’s largest LNG export capacity. Supported by increased export capacity, OGJ expects that US LNG exports in 2022 will continue to increase by 17%, reaching 11.5 bcf/d.

During the first 9 months of 2021, Mexico imported 5.95 bcf/d of US natural gas by pipeline, compared to 5.45 bcf/d averaged for the whole year of 2020. Natural gas demand in Mexico is projected to continue growing, supported by new electrical generation capacity additions, greater industrial demand, and new pipeline additions.

US natural gas exports to Canada through pipeline averaged 2.48 bcf/d during the first 9 months of 2021, compared with an annual average of 1.82 bcf/d in 2020.

The volume of US natural gas in storage has been below its previous 5-year average since mid-February of 2021, following a period of significant cold weather in late January through mid-February. Working natural gas in storage in the Lower 48 states was 3% below the 5-year average as of early November 2021 and is expected to remain less than the previous 5-year average through the 2021-2022 winter.