As international crude oil prices hit a 2-month high earlier this week, hopes of a likely respite are fading fast. The likes of US Energy Information Administration, Opec, JP Morgan and a host of others have revised the price forecast upwards for 2022. It was not long ago when Opec and the International Energy Agency were hinting at a likelihood of oil market returning towards a semblance of equilibrium within weeks.
That did not happen, and oil has instead rallied back to $80 and above and rising. The reasons are aplenty, led by the massive underinvestment in upstream oil industry in the last two years since the onslaught of Covid-19. The oil market continues to be tight as Opec Plus members continue to show exemplary levels of compliance in the production target controls.
The ability to ramp up production by Opec Plus members has also been put to a stern test in the last five months, where smaller members have failed to ramp up production as per allowed quota. The last five months have seen Opec Plus underproduce by an average of 500 million barrels a day. Opec officials have hinted that the world may not yet be ready for oil at $100/bbl, maintaining that the Group would rather prefer a tight market going deep into 2022.
The global crude oil stockpile has gone down, and the spare capacities stand at multiyear low. According to the EIA Short-Term Energy Outlook, global liquid fuel inventories fell by an average of 1.4 million barrels per day in 2021 – in stark contrast to an upside of 2.1 million barrels a day in 2020. The US EIA has lowered the oil spare capacity estimate for 2022 by 0.8 million barrels a day.
The biggest challenge has been underinvestment in the oil sector, which could not have gone unnoticed. Inadequate levels of investment mean the industry would struggle to jack up supplies in the likely scenario of 8-10 percent additional demand, as Omicron concerns have considerably eased. On the other hand, there are unrelated supply constraints with other key players such as Libya. From what it appears, another year of high oil prices awaits the world, unless the demand side shocks overpower supply constraints – against the street consensus.