CRUDE IN SIGHT

Crude slips from 7-year highs early Thu as fear premium recedes - Jan. 20, 2022

  • Crude futures were backing off fresh seven-year high settlements early Thursday in Asia after Turkey resumed normal operations at the 450,000 b/d Kirkuk-Ceyhan crude export pipeline and tensions around Yemen’s Houthi rebels launching drone attacks on Abu Dhabi on Monday receded a bit.
  • Though the American Petroleum Institute’s latest weekly US stocks report wasn’t exactly bearish, it did show a build of 1.4 million barrels in crude inventories after seven consecutive weekly draws and against analyst expectations of a decline of 700,000 barrels, likely calming market nerves.
  • The International Energy Agency on Wednesday said global oil markets look tighter. It raised 2022 global oil demand forecast by 200,000 b/d to 99.7 million b/d, citing a milder-than-expected impact of the Omicron, while noting that the supply situation was becoming more worrying.

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OIL VIEWSLETTER

Crude looks past Omicron as data validates mild impact expectations - Jan. 14, 2022

It is exactly seven weeks since the Omicron stormed onto the global stage as a “variant of concern”, sparking a panicky sell-off in risk assets, including oil. Though the dive looked overdone as it persisted through early December, especially as the initial reports from South Africa, where the highly mutant strain was discovered, did not give cause for alarm, the markets weren’t going to take a chance. 

Covid has already thrown many curve balls at us. But now, it might just be at an inflection point between  pandemic and endemic.

Data is fostering growing confidence in the scenario that the Omicron, despite being far more contagious than the previous strains of the SARS-CoV-2 virus, does not cause serious illness like the Delta variant, at least among vaccinated populations. The most convincing proof has emerged from the UK, where Covid is already receding, with the Omicron-led surge past its peak, proving to be a short-lived explosion, and one that did not cause a commensurate rise in mortality.

The hope now is that the US – and other countries reeling under the Omicron waves – will follow in the same path. 

As the market rushes to upgrade short-term global oil demand expectations, supply crimps and concerns naturally come into sharper focus. And it’s not just the kind of synchronised upstream outages and disruptions we saw last week – the OPEC+ production shortfall against its monthly targets is growing and the problem looks well-entrenched.

Where does China fit into this bullish story, the second-largest economy still imposing stringent curbs and lockdowns on millions of residents in pursuit of its Covid Zero policy? The deceleration in its oil demand growth may already be baked in.

 

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BULLS & BEARS

Dec 2021: Mildly bullish near-term, mildly bearish for Jan-Feb - Dec. 10, 2021

When the Omicron stormed onto the global centre-stage on November 26, it turned all economic growth assumptions and market forecasts on their head and prompted a panicky flight from risk assets.

An oil market that had been riding on a strong bullish momentum since the end of September on the back of gas and coal shortages going into the high-demand winter months suddenly deflated. Crude crashed by a cumulative 16% in just four trading sessions. It has regained about half that ground since, as two weeks on, the assessment is that the highly mutated Omicron variant may be more transmissible than the Delta strain but may not cause severe illness.

However, these are preliminary findings and it is hard to say if the desperate desire to snatch optimism from the jaws of a threat is playing a part in the sentiment pivot. 

Meanwhile, the broader financial markets have more reasons to be on the edge. The US Federal Reserve, which meets for its last policy meeting of the year next week, is expected to accelerate the end of its bond-buying program to Q1 instead of mid-2022 as signalled earlier, paving the way for its first post-Covid interest rate hike, potentially as early as March. That does not inspire confidence in the markets contemplating all the headwinds already blowing at the global economic recovery.

The OPEC/non-OPEC alliance has kept the supply reins tight this year. It is braced for a swing to a surplus in 2022 but will also have to gradually release its remaining 3.8 million b/d of production into the market starting in January.

 Our latest Bulls & Bears report concludes 

  • Mildly Bullish sentiment for the near term 
  • Mildly Bearish sentiment for Jan-Feb 2022

The Mildly Bullish sentiment corresponds to Brent strengthening to the high-$70s. Our base case is that the Omicron will temporarily disturb but not derail the return to normalcy, enabling crude to reclaim most – though not all – of the ground lost in the Omicron sell-off. We don’t see Brent clambering back above $80 as Omicron fears will persist, international travel will remain curtailed, mobility will remain somewhat constrained over the year-end holiday period and a hawkish Fed could dampen risk appetite. Lastly, the US will stand ready to play the SPR card again if crude races into the $80s. 

The mildly bearish sentiment corresponds to Brent sliding back into the low-$70s, as the energy crisis and winter oil demand bump gradually begins to ease next month and non-OPEC+ supply continues to rise, while a potential return of Iranian barrels also comes back on the radar.

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EXECUTIVE BRIEFING NOTES

Prospect of IRAN deal becomes an unlikely cap on crude's rally - Oct. 29, 2021

The administration of ultraconservative Iranian president Ebrahim Raisi agreed to return to the negotiating table with the world powers this week in an effort to revive the 2015 nuclear deal, triggering a hasty sell-off in crude.

Talks are expected to start by the end of November and given their difficult nature and the hurdles that forced a stalemate in the last round of negotiations this summer, could take a few months to deliver an agreement, if they are to produce one at all. 

As a result, any supply hike from Iran will not come in time to relieve the upward pressure on crude from bulls betting on a worsening coal and gas crunch this winter.

Also, the US is unlikely to lift all oil sanctions against Iran in one go as they could serve as a key lever to ensure Tehran complies with its new pledges.

But crude’s speculative froth just needed a trigger to dissipate and the Iran news provided one. After Wednesday’s 2% slump from fresh multi-year highs, Brent and WTI futures were continuing to take a breather as we closed this report.

But the pause could dovetail with a gradual easing of Europe’s gas shortage, as Putin has instructed Gazprom to focus on filling European storages from November 8, while China is also slowly digging it way out of a coal crunch by boosting domestic supply as well as imports.

Crude could continue to soften in the coming weeks if the energy crisis indeed abates, which means this year’s price peaks may be behind us. But we don’t expect a major correction in the short term.

 

ENERGY RADAR

Oil in 2022: Through the prism of Covid, a year of moderating prices - Dec. 27, 2021

As the American baseball player Yogi Berra, known for his witticisms, might have said if he were alive today, “It’s déjà vu all over again”.

Once again, on the cusp of a new year, it feels like a duel in the making over the pandemic’s future. When 2020 was coming to a close, it was the promise held by Covid vaccines starting to be rolled out, against a deadly winter wave of infections that had begun sweeping across the northern hemisphere.

This year, it is hope that the nearly 9 billion doses of vaccines administered across the world – and growing by the day – has given us a fighting chance to put the worst of the pandemic’s fallout and the need for crippling restrictions behind us, against anxiety that the Omicron variant may pierce through the current lines of defence. 

To have a reasonably defensible prognosis of the oil market in 2022, one has to understand this pandemic without the advantage of being an epidemiologist and sift through the vagaries of the global economic recovery even if not trained as an economist.

Through 2021, our sixth year of publishing the daily Crude in Sight, the weekly Oil Viewsletter, the monthly Bulls & Bears and the event-driven Executive Briefing Notes, we have distilled data, events and forces at work in the market and provide you with our most considered view plainly and succinctly. We didn’t get it right 100% of the time when predicting price direction – but we got it right most of the time, and we are proud of that! 

In this ultimate report of the year, we present our views and expectations of the oil market in 2022 – not by looking into a crystal ball, but peering through the prism of Covid. Because we believe the pandemic will remain the overarching influence on the global economy and oil demand in the new year.