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Oil Market Report - December 2021

EXECUTIVE SUMMARY

Crude oil prices ended November 2021 sharply lower after broad sell-offs in futures and equity markets triggered by fears that the rapid spread of the new Omicron variant could derail the global economic and oil demand recovery. Market sentiment worsened due to a lack of information about the severity of this new variant, while news reports amplified concerns that the Omicron variant could be potentially more transmissible and more resistant to the available vaccines. The ICE Brent and NYMEX WTI benchmarks ended November 2021 about 16.7% and 21.3% lower, respectively, compared to early November levels, to reach their lowest since August 2021 on daily basis. The sharp decline in oil prices mirrors a sudden change in sentiment from October's bullish market when oil futures prices hit their highest since 2014.

The drop in oil futures prices in the fourth week of November 2021 occurred in a market already under pressure since early in the month. Crude oil prices started to retreat in the first half of November 2021 from multi-year highs amid easing concerns about an energy crisis and higher oil demand from the gas-to-oil switch as gas prices moved lower in major hubs. The return of lockdowns in Central Europe and Russia due to rising COVID-19 cases earlier in November and in the UK in October, when case numbers reached their highest level since July 2021, raised further concerns about near-term oil demand and weighed on oil prices. Investors were also eyeing a new wave of COVID-19 infections in many areas, including Europe and China, which impacted mobility indexes.

Oil prices resumed their downward trend in the third week of November 2021 amid rising volatility as perceptions shifted from a tight oil market in the short term to a risk of an oversupplied market. Market sentiment deteriorated on concerns about the global oil demand outlooks due to the surge of COVID-19 cases in Europe and other regions, and the US dollar jumped against a basket of other major currencies to its highest level since July 2020. Worries about the oil demand outlook intensified further after Austria imposed a national lockdown, while other countries tightened COVID-19-related measures to curb rising infections. Meanwhile, investors weighed the impact of a potential release of crude oil from SPRs in major consuming countries, while the IEA in its November monthly report forecast a 1.5 mln bbl / d increase in global oil supply in November and December of 2021. Furthermore, the OPEC, the IEA and other major agencies projected global oil supply exceeding global oil demand in 1Q22. Earlier in the fourth week of November, oil prices were little changed after the US and other large consumer countries announced crude oil releases from their SPRs. But the news about the Omicron variant later in the week pushed oil prices sharply lower on worries that further mobility restrictions and lockdowns could dampen oil demand.

In early December 2021, the crude oil markets had found some grounds and returned back to the level of $75.0 / bbl on ICE Brent front-month futures as fears over the new coronavirus variant eased on the back of medical reports that show milder-than-anticipated symptoms and a surprise RRR cut from China boosted risk appetite. The rally also was pinned on foreign demand for the US strategic oil sale. However, the recovery of crude oil prices turned out to be short-lived and the market again reversed to the downside in the middle of the month as the fast spread of the omicron virus variant around the world and new lockdowns in various European countries again raised concern over the demand outlook. All in all, both ICE Brent and NYMEX WTI benchmarks ended the period under report significantly lower. The ICE Brent front-month futures contract tumbled since November 19, 2021 by $7.58 / bbl, or -9.6%, and the NYMEX WTI nearest contract crushed by $7.57 / bbl, or almost -10.0% over the same period of time.

Total crude oil output in the OPEC showed a further rise of 350 thsd bbl / d in November 2021 in comparison with the volume of October 2021, or +1.3% MoM. In monthly terms, total crude oil production of the cartel grew in the course of the 7th consequent month, in accordance with the OPEC+ policy of gradual reduction of the COVID-related supply cuts. However, real OPEC’s production growth in November 2021 again was somewhat lower, comparing to the agreed OPEC+ monthly adjustment of +400 thsd bbl / d. Nevertheless, the output climbed up to its peak print since April 2020 and for the first time in post-COVID era moved above the level of 28.0 mln bbl / d. In annual terms, total oil production by the OPEC states all together again experienced a solid expansion, though the rate of yearly growth continued to decelerate. In November 2021, total output of crude oil by the cartel increased by 2.74 mln bbl / d relative to one year ago volume, or +10.9% YoY. The most part of OPEC participating states exhibited an expansion of their output of crude oil in November 2021 in comparison to the volumes of October 2021. The most formidable growth of oil output during the month was registered in Iraq, where the extraction of crude oil went up by 100 thsd bbl / d in contrast to one month ago level, or +2.4% MoM. Nigeria exhibited a significant increase of its output of crude oil in November 2021, the output in the country expanded by 90 thsd bbl / d as against the month prior, or +6.3% MoM. But the most rapid increase of extraction of crude oil in the month under review in relative terms was recorded in Venezuela. The production there exhibited a rapid growth of 8.6% MoM, but only +50 thsd bbl / d in absolute terms.

The OPEC agreed to continue its strategy of gradual removing of supply cuts on the 23rd OPEC and non-OPEC Ministerial Meeting that was held on December 2, 2021. The Meeting completely reaffirmed its earlier decisions and reconfirmed the production adjustment plan and the monthly production adjustment mechanism and the decision to adjust upward the monthly overall production by 0.4 mln bbl / d for the month of January 2022, as per the attached schedule. Also, the Meeting extend the compensation period until the end of June 2022 as requested by some underperforming countries and request that underperforming countries submit their plans by December 17, 2021. Finally, the Meeting agreed that the meeting shall remain in session pending further developments of the pandemic and continue to monitor the market closely and make immediate adjustments if required. The next 24th OPEC+ meeting is scheduled for January 4, 2022.

Global production of oil again expanded in November 2021, as compared to the month prior, the rise was equal to 1.15 mln bbl / d, or +1.2% MoM. November was the third month of global oil output expansion in a row. So, the volume of the output reached its new highest mark since April 2020 and went marginally above the level of 99.0 mln bbl / d. In annual terms, global oil production also continued to deliver a healthy growth. Comparing to the level of November 2020, it grew by nearly 6.0 mln bbl / d, or still impressive +6.5% YoY. November 2021 was the 8th consequent month of global oil production expansion on an annual basis. Nevertheless, global oil output still remained lower than it was before the start of the pandemic, though the gap narrowed to just 1.0 mln bbl / d. As against the pandemic through, recorded in May-June of 2020, the production of oil around the globe rose in November 2021 by 10.85 mln bbl / d, or +12.3%. The most part of non-OPEC countries experienced a rise of their oil production in November 2021 as compared to October 2021. In absolute terms, the most formidable increase of oil output during the month was again observed in the USA. In November, the production in the USA went up by 250 thsd bbl / d relative to the prior month, or +1.3% MoM, or +250 thsd bbl / d. Total oil output in the country built up throughout 2 months in a row, so the extraction of oil in the USA grew in November 2021 to its new highest value since March 2020 equal to 19.77 mln bbl / d. However, in relative terms, the more rapid expansion of oil extraction in November 2021 was exhibited in Brazil. The production of oil in this country demonstrated an impressive rise by 6.2% MoM, or +223 thsd bbl / d as against the volume of October 2021.

Primary oil production in the USA, measured as the sum of crude oil output and NGLs production, continued to grow and ramped up in November 2021 by another 238 thsd bbl / d in compare to the previous month, or +1.4% MoM. The primary oil production in the country showed an expansion in the course of 2 months in a row and grew to its peak volume of 17.07 mln bbl / d since April 2020. Nevertheless, the volume of the primary oil production in the USA remained lower comparing to the pre-pandemic level of February 2020. But the gap narrowed in the month under review to just 284 thsd bbl / d, or 1.6%. On a year-over-year basis, the primary oil production in the USA expanded considerably in November 2021 as well, similar to several preceding months. The growth over last 12 months was equal to 868 thsd bbl / d, or +6.1% YoY. The output in the USA continued to grow annually in the course of consequent 7 months.

Total shale oil output increased further in the USA in November 2021 on a monthly basis, for the 9th consequent month. During the month under review, the output grew up by another 172 thsd bbl / d in contrast to the volume of October 2021, or +2.0% MoM. In November 2021, the volume of the US shale oil production reached its fresh maximum since March 2020 of 8.67 mln bbl / d. As for a yearly basis, total production of shale oil in the USA again showed a more robust growth and expanded by 649 thsd bbl / d in compare to one year ago level, or +8.1% YoY. So, total shale oil production in the country continued to grow in annual terms for the 7th month in a row. Conversely to its usual pattern, when the dynamics of total shale oil output in the USA was attributed mainly to the changes of shale oil production on the largest in the country Permian deposit, in November 2021 the overall growth of total shale oil output was achieved due to the simultaneous expansion of output on several shale oil fields. Thus, the most material rise of the output in the month under review was recorded on the deposit of Eagle Ford, where shale oil production increased by 79 thsd bbl / d in contrast to the volume of the previous month, or +7.5% MoM. The output of shale oil on Bakken and Niobrara deposits also exhibited a solid growth in November 2021 as against October 2021. In particular, the production on Bakken deposit went up modestly by 39 thsd bbl / d, or +3.3% MoM, the fourth month of expansion in a row. At once, shale oil output on Niobrara deposit experienced a growth of 25 thsd bbl / d in contrast to the level of October 2021, or + 4.1% MoM.

The International Energy Agency (IEA) released detailed statistics on consumption of crude oil and petroleum products around the world for the 3rd quarter of 2021 during the period under report. Total consumption of crude oil and petroleum products around the globe continued to grow in the 3rd quarter of 2021 and expanded further by 2.51 mln bbl / d as compared to the volume of the 2nd quarter of 2021, or +2.6% QoQ. So, the demand rose to its new maximum value of 97.69 mln bbl / d since the start of the pandemic and remained close to its average level for this quarter of a year over last 5 years. The gap relative to the volume of the last pre-pandemic quarter, namely the 4th quarter of 2019, narrowed to just 2.91 mln bbl / d, or 2.9%. On a year-over-year basis, the demand strengthened in the 3rd quarter of 2021 by 5.60 mln bbl / d, or +6.1% YoY, a significant slowdown comparing to the quarter prior. On an annual basis, the demand proceeded to grow worldwide during the 2nd quarter in a row. On a regional level, the most significant growth of the demand was exhibited in Europe. Total consumption of crude oil and refined oil products in the region expanded in the 3rd quarter of 2021 by 1.12 mln bb/ d relative to the previous quarter, or +8.9% QoQ. The demand in Europe showed an increase for 2 quarters in a row and reached its new record high since the 4th quarter of 2019 equal to 13.77 mln bbl / d. On the other hand, the strongest contraction of the demand during the quarter was observed in Asia, where the consumption dropped by 320 thsd bbl / d over last 3 months, or -1.1% QoQ, the worst quarterly performance of the indicator over last 12 months.

However, according to the most recent IEA monthly report, the surge in new COVID-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway. New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous COVID waves, not least because of widespread vaccination campaigns. As a result, the IEA expect demand for road transport fuels and petrochemical feedstock to continue to post healthy growth. However, due to new restrictions on international travel, the agency have revised down its global oil demand forecast for 2021 and 2022 by 100 thsd bbl / d on average, primarily to account for reduced jet fuel use. Global oil demand is forecasted now by the IEA to grow by 5.4 mln bbl / d in 2021 and a further 3.3 mln bbl / d next year, when it rebounds to pre-pandemic levels at 99.5 mln bbl / d.

Total commercial stocks of crude oil and petroleum products in OECD states proceeded to deplete on a monthly basis for the 4th month in a row and declined in September 2021 by 51.5 mln bbl / d in compare to August 2021, or another -1.8% MoM. The combined contraction of the inventories over last 4 month was equal to 169.3 mln bbl, or -5.8%. So, the inventories dropped to their new lowest level since early 2015 and, therefore, sank well below their pre-pandemic levels. In annual terms, the volume of total commercial stocks of crude oil and petroleum products in OECD states as a whole obviously tumbled again in September 2021 as against September 2020. The yearly drop was equal to a sizeable amount of 415.7 mln bbl, or -13.1% YoY, a certain acceleration comparing to the previous month. According the preliminary IEA assessments, OECD total crude oil and petroleum products stocks fell further by 21.2 mln bbl in October 2021, as a build in crude oil inventories was more than offset by sharply lower product stocks. At 2.737 bn bbl, total stocks were 243 mln bbl below the 2016-2020 average. Early data for November 2021 show industry stocks decreased by a further 23 mln bbl, and crude oil held in short-term floating storage rose by 8.4 mln bbl to 134.5 mln bbl.

Total stockpiles of crude oil and petroleum products in the USA again little changed in November 2021 as compared to the month prior after 6 months of decline in row. But, on the contrary to the previous month, this time the volume of the stocks decreased within the month by 3.1 mln bbl, or -0.4% MoM. So, as of the end of November 2021, the total stockpiles in the USA again were close to their lowest level over recent 3 years, slightly above 770 mln bbl. In annual terms, total inventories of crude oil and petroleum products in the USA in November 2021 again were much lower than they were one year ago. The yearly drop this time was equal to 95.1 mln bbl, or -11.0% YoY. The inventories continued to deplete in yearly terms for 8 months in a row. Recall that total inventories of crude oil and oil products in the USA reached their all-time high in May-June of 2020, when the volume of the stocks was equal to 964 mln bbl. Relative to that level the inventories were lower in November 2021 by nearly 198 mln bbl, or more than 20%.

Crude oil inventories in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) finally reversed to the upside in November 2021 after 12 months of depletion in a row with a combined drop of 34.5 mln bbl, or -56.7% relative to the maximum of October 2020. The volume of the stocks in Cushing expanded in November 2021 by 2.1 mln bbl relative to the previous month, when it fell to the lowest level since September, or +8.1% MoM. Notwithstanding its positive monthly dynamics, the volume of crude oil inventories in the Cushing storage remained in November 20221 below its lower border of the range for this month of a year over last 5 years. So, the level of stocks in Cushing still remained very low from the retrospective point of view. On an annual basis, crude oil inventories in Cushing still delivered a steep decline within the month under review and crumbled by 31.0 mln bbl relative to one year ago level, or still shocking -52.1% YoY. November 2021 was the 8th month in a row of Cushing stocks depletion in yearly terms.

The volume of total floating inventories of crude oil around the globe continued to fluctuate slightly above the level of 90 mln bbl for the 5th month in a row. In November 2021, the stocks expanded by 1.0 mln bbl relative to the month prior, or +1.1% MoM, the second month of growth in a row. So, technically, the volume of the inventories climbed to its new highest level over last 6 months and remained well above the average level for this month of a year over last 5 years. Meanwhile, global floating inventories of crude oil again were much lower in November 2021 in annual terms. The annual depletion was equal to 24.5 mln bbl, comparing to the level of November 2020, or -20.7% YoY. From a point of view of yearly dynamics, the volume of crude oil that held offshore worldwide continued to fall within consequent 8 months. The most significant depletion of floating crude oil inventories during the month under review was registered in Asia, where the inventories in the region tumbled by 7.3 mln bbl as compared to one month ago level, or -11.4% MoM. Due to its strongly negative performance, the share of Asia in global floating inventories of crude oil dropped within the month by more than 1000 bps MoM. On the other hand, the most considerable growth of floating stockpiles of crude oil among all regions in Vortexa dataset in November 2021 was observed in the Middle East Gulf. The volume of the stocks there demonstrated a growth of 2.4 mln bbl as against the month prior, or +29.8% MoM, after 3 consequent months of decline. Thanks to its leading monthly dynamics, the Middle East Gulf climbed up two notches in the ranking of largest holder of oil floating stocks in the world to the second place. Its share improved over the last month by 490 bps and reached 11.0% as of the end of the month under consideration.

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