How much further does the oil price have to run?

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Commodities

Having risen solidly from mid-December, the oil price took a bit of a hit just prior to the new year as worries about the spread of the omicron variant and its possible impact on travel and GDP growth hit prices.

Brent crude oil price chart

SodelVladyslav/Adobe Stock

The new year has started more optimistically, though. While significant work days are being lost due to widespread infections, hospitalizations have remained sufficiently acceptable to avoid the widespread lockdowns that proved so damaging following the spread of previous variants.

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Oil prices look bullish

As an OilPrice.com newsletter observed this week, there has been a noticeable shift in sentiment in the oil market, with an increasing number of forecasts taking a bullish stance.

Oil demand remained solid in December, essentially trending on par with November levels. Meanwhile, global manufacturing activity strengthened amid easing supply chain bottlenecks.

The supply side remains a mixed bag. OPEC+ agreed at its most recent meeting to extend an increase in February of 400,000 barrels per day. However, as OPEC+ has increased its output target each month, actual production has lagged as some members struggle with capacity constraints.

So, the announcement of a further increase is being taken by the market with a pinch of salt.

OPEC+ producers missed their targets by 730,000 bpd in October and by 650,000 bpd in November, the International Energy Agency said last month.

Libya is substantially down, with the national oil company just announcing that the country’s oil production would be reduced by 200,000 b/d. A leaking trunk pipeline will be undergoing maintenance, essentially halving the country’s production to 700,000 b/d amid persisting blockades in its western regions, OilPrice.com adds.

According to the Energy Information Administration’s (EIA) most recent report in late December, U.S. crude oil production in 2021 decreased by 0.1 million barrels per day (b/d) from 2020 and by 1.1 million b/d from 2019. Cold weather in February and hurricanes in August contributed to this decrease. Furthermore, a decline in investment among U.S. oil producers since mid-2020 after a wave of consolidation in the shale or fracking industry resulted in a policy shift, a focus on profits rather than investment.

Demand picture

On the demand side, the story is solid rather than dramatic.

The coronavirus recovery is varied depending on the region. Some countries are ahead of others, but the integrated nature of the global market means recoveries are across the board and, with them, oil demand.

The oil market has been in supply-demand deficit for six quarters in a row but forecasts indicate it could be broadly in balance in Q1 2022. As such, price pressures could ease.

The EIA is expecting inventory drawdowns to gradually reverse this year and subsequent stock builds should contribute to downward pressure on crude oil prices. The EIA forecasts Brent Crude prices averaging $71/barrel in Q2 2022, $70/barrel in Q3 2022, and $67/barrel in Q4 2022. But with part of an increased supply expected to come from U.S. shale, there remain caveats to their predictions.

So far, the profitable price point for WTI has not resulted in a resurgence of U.S. shale output.

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