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Oil Market Report - February 2022

EXECUTIVE SUMMARY

Crude oil prices ended January 2022 substantially higher compared with the previous month. Crude oil quotes were driven up by both strong global oil market fundamental and non-fundamental factors. Thus, oil prices recovered from December 2021 lows as market sentiment improved and investors’ perception of strong global oil supply and demand fundamentals shifted from worries about oversupply to the prospect of tightening in the oil market fundamentals. Market sentiment turned positive, as fears about the negative impact of the rapid surge of the COVID-19 Omicron variant on demand dissipated, and data showed that the new variant is less severe than previously anticipated. This prompted many countries, including European countries, to ease COVID-related restrictions. Meanwhile, global oil demand data showed a resilient recovery, and the physical crude market showed signs of strong fundamentals. In its January monthly report, the IEA expressed more optimistic demand outlooks, increasing its world oil demand estimates for both 2021 and 2022. Moreover, oil prices were supported by concerns over oil supply in the short term amid several supply outages and disruptions in December and January, including in Kazakhstan, Libya and Ecuador, in addition to rising geopolitical risks in other oil-producing regions, such as Eastern Europe and the Middle East.

Meanwhile, speculative activity also increased, with money managers sharply raising net long positions to their highest point since November 2021, betting on tight market fundamentals. A sharp appreciation in the US dollar value against a basket of major currencies in the second half of January, as well as volatility in equity markets and market expectations for a rate increase from the US Federal Reserve, was largely offset by a bullish outlook for global oil supply/demand fundamentals. The ICE Brent front-month futures contract rose by as much as $10.77, or 14.4%, in January 2022 to average $85.57 / bbl, and NYMEX WTI increased even more rapidly by $11.29, or 15.7%, to average $82.98 / bbl. On an annual basis, ICE Brent was $30.25, or 54.7%, higher at $85.57 / bbl, while NYMEX WTI was higher by $30.88, or 59.3%, at $82.98 / bbl, compared with the same period a year earlier.

A blistering rally on the crude oil market well continued in the first two weeks of February 2022 with crude oil prices rose to the highest since 2014 underpinned by roaring demand, constrained supply, and declining inventories. Prices in London at one point rose past $96 a barrel and analysts forecasts for $100 intensified. Nowhere is the move clearer than in the world’s most important physical oil price - Dated Brent -- which on February 16, 2022 topped $100 for the first time since 2014. The market for real barrels in the North Sea has boomed vigorously, with differentials for some physical cargoes hitting the highest on record. However, the sentiment on the market weakened somewhat in the middle of the month as investors weighed the crisis over Ukraine and the possibility that Iran’s nuclear deal may be revived. Iran’s top negotiator, Ali Bagheri Kani, tweeted recently that efforts to restore the nuclear deal are “closer than ever” to an agreement. Issues surrounding Iran’s nuclear accord are set to be discussed at a key transatlantic security meeting in Munich this weekend. 

Despite to a recent cool down, both ICE Brent and NYMEX WTI benchmarks again ended the period under report considerably higher, for the second month in a row. The ICE Brent front-month futures contract climbed up since January 20, 2022 by further $3.42 / bbl, or +3.9%, and the NYMEX WTI near-month contract moved higher by $4.89 / bbl, or +5.7% over the same period of time.

In January 2022, the production of crude oil by the OPEC as a whole expanded only marginally, comparing to the month prior. The monthly growth was equal to just 50 thsd bbl / d, or +0.2% MoM, although OPEC+ agreed at its January meeting to improve the output by another 400 thsd bbl / d during the month. On a month-over-month basis, the combined output of crude oil in the cartel built up within the 9th consequent month, but again it was the new smallest monthly rise over the period. Nevertheless, the production in the OPEC ran to its new marginal high since April 2020 equal to 28.14 mln bbl / d. In annual terms, the total oil production in the OPEC still delivered a solid growth and ramped up in January 2022 by 2.35 mln bbl / d relative to January 2021, or +9.1% YoY. It was the 9th consequent month of expansion of the output on a yearly basis. The most considerable monthly expansion of oil output among OPEC states during the month under review was registered in Nigeria, where the oil production ramped up by 100 thsd bbl / d as against the previous month, or +7.0% MoM

Despite to the growth of crude oil prices to their maximum levels over more than 7 years in late January 2022 with Brent benchmark moved beyond the threshold of $90 per bbl, the OPEC+ didn’t make any steps to ease market conditions on its most recent 25th OPEC and non-OPEC Ministerial Meeting that was held on February 2, 2022 and just repeated the decision that was in place for several preceding months. More exactly, the Meeting reconfirmed its earlier production adjustment plan and the monthly production adjustment mechanism and again decided to adjust upward the monthly overall production by 0.4 mln bbl / d for the month of March 2022, as per the attached schedule. Also, the Meeting repeated that it extends the compensation period until the end of June 2022 and reiterated the critical importance of adhering to full conformity. So, the Meeting again didn’t bring any new information to the market. The next 26th OPEC+ meeting is scheduled for March 2, 2022.

The total oil production worldwide continued to expand in January 2022 on a monthly basis for the second month in a row and rose as against the volume of December 2021 by 404  thsd bbl / d, or +0.4% MoM. The volume of the output reached its new maximal level since April 2020, equal to almost 99.0 mln bbl / d. On an annual basis, the global oil production again demonstrated a much more profound expansion in January 2020 relative to the monthly dynamics. Relative to one year ago level, the global output improved by sizeable 5.42 mln bbl / d, or +5.8% YoY. It was the 10th consequent month of a global oil production expansion in yearly terms. As against to the pandemic trough, recorded in May 2020, the production of oil around the globe rose in January 2022 by roughly 10.78 mln bbl / d, or +12.2%. The larger half of countries in the non-OPEC group exhibited a rise of their oil production in January 2022 as compared to December 2021. On absolute and relative bases, the most material monthly expansion of oil production in the month under review was observed in Ecuador, which suffered the worst decline of the output during the month prior. The production in the country nearly completely restored in January to its normal level as two major country’s export pipelines were re-opened. The monthly growth of the output was equal to 240 thsd bbl / d, or dramatic +105.9% MoM. China also showed a considerable increase of its oil output in January 2022 on a month-over-month basis. The production in this country went up during the month by 139 thsd bbl / d, or +2.8% MoM. Such countries as Russia and Canada exhibited a more moderate increase of oil extraction in January 2022 in monthly terms. In particular, the production of oil in Russia ramped up in January 2022 by 99 thsd bbl / d as compared to the previous month, or +0.9% MoM. The oil output in Canada expanded in January 2022 by 88 thsd bbl / d as against to December 2021, or +1.5% MoM. From a monthly dynamic point of view, the production in the country grew during the fourth consequent month. So, the extraction of oil in Canada reached its new highest print of 5.90 mln bbl / d over the whole history of observation. On the other hand, the most formidable monthly decline of oil production in January 2022 was registered in the USA. The output in the country contracted by 236 thsd bbl / d relative to the month prior, or -1.2% MoM. In January 2022, the production of oil in the USA fell over 2 months in a row.

Primary domestic oil production in the US, counted as the sum of crude oil and NGLs production, continued to grow in January 2022 on a monthly basis for the 4th month in a row, according to the weekly US DOE data, though the dynamics of the overall oil output in the country in this month again was strongly negative. Thus, the primary US oil production grew in January 2022 by 73 thsd bbl / d in compare to the level of December 2021, or +0.4% MoM. So, the primary oil output in the US built up to its new maximum volume since April 2020, equal to 17.34 mln bbl / d. In yearly terms, the primary domestic oil production in the US also showed strongly positive dynamics in January 2022. More exactly, it expanded by 1.09 mln bbl / d in contrast to one year ago level, or solid +6.7% YoY. From a yearly change point of view, the primary US production expanded within consequent 3 quarters. Conversely to the preceding month, the monthly expansion of the primary domestic oil production in the US in January 2022 was fully attributed to the growth of the NGLs production, while the output of crude oil in the country, on the contrary, declined relative to the previous month.

Total output of shale oil in the US finally reversed to the downside in January 2022 after 10 months of expansion in a row and declined by 134 thsd bbl / d in comparison with the volume of the month prior, or -1.6% MoM. Despite to a certain monthly decline, the volume of shale oil production in the US remained rather close to its highest level since March 2020. In yearly terms, the output of shale oil in the US, on the contrary, improved considerably in January 2022 and grew by 597 thsd bbl / d, or 7.5% YoY. From a point of view of annual dynamics, the production exhibited an increase throughout 9 months in a row. The majority of shale oil deposits in the US exhibited a decline of their output in the month of January 2022 as compared with the month prior. On an absolute basis, the strongest monthly fall of production of shale oil in January 2022 was observed on the Permian deposit, where the production fell by 93 thsd bbl / d relative to one month ago level, or -1.9% MoM. Eagle Ford likewise showed a material contraction of its production of shale oil in January 2022 from a standpoint of a monthly performance. The production there dropped by 41 thsd bbl / d, or -3.6% MoM. Bakken also demonstrated a certain contraction of its shale oil output during the month under review. The monthly decline there was equal to 23 thsd bbl / d, or -1.9% MoM.

A reassessment of historical data, made by the IEA in it’s the most recent monthly report, has resulted in a significant upgrade to agency’s demand estimates, as more complete information became now available and new methodologies for capturing data continue to shed light on areas not well covered in official statistics. While the data revisions lift demand for Saudi Arabia (in LPG consumption) and China (in the petrochemical sector) – by nearly 800 thsd bbl / d, overall growth rates are barely changed. The IEA expects now that world oil demand will expand by 3.2 mln bbl / d this year, to reach 100.6 mln bbl / d, as restrictions to contain the spread of COVID-19 ease.

Total commercial stocks of crude oil and petroleum products in OECD states continued to decline in November 2021 for the 11th month in a row as the data for October 2021 was revised to the downside from the initial estimate of +0.1% MoM to -0.8% MoM. In November 2021, the volume of the stockpiles dried up by 17.7 mln bbl in compare to the previous month, or -0.6% MoM. It means that the total oil inventories in the OECD tumbled to their new lowest level since the middle of 2014, well below not only pre-pandemic levels, but below the average and minimal levels for this month of a year over last 5 years as well. On an annual basis, the total commercial stocks of crude oil and petroleum products in OECD states again delivered strongly negative dynamics in November 2021, the same as during several preceding months. This time, the volume of the inventories tumbled by a sizeable amount of 390.8 mln bbl in compare to one year ago level, or -12.6% YoY, a certain speedup of the decline relative to the prior months.

According the preliminary IEA assessments, OECD total crude oil and petroleum products stocks declined further by a steep 60 mln bbl in December 2021, led by large draws in middle distillates across all regions. At 2.68 bn bbl, the oil inventories were 355 mln bbl lower than a year ago and at their lowest in seven years. Stocks covered 59.6 days of forward demand, a decrease of 0.9 days from a month earlier and 3.2 days below the historical average. Early data for January 2022 show OECD industry stocks falling by another 13.5 mln bbl to the new multi-years low.

Total stockpiles of crude oil and petroleum products in the US continued to expand in January 2022 for the second month in a row and widened further by 10.4 mln bbl in contrast to December 2021, or +1.3% MoM, the most rapid monthly grow for more than a year. The volume of the stocks grew to its highest level over last 5 month. In annual terms, total inventories of crude oil and petroleum products in the US again dropped significantly in January 2022. Comparing to one year ago level, the volume of the inventories tumbled by sizeable 102.7 mln bbl, or -11.5% YoY. The total inventories in the US proceeded to deplete on a yearly basis for 10 months in a row. Conversely to the month prior, the monthly growth of the overall oil stocks in the US in January 2022 was completely attributed to the expansion of petroleum products inventories, while the stockpiles of crude oil in the country were lower in the month under review relative to the previous month.

Crude oil inventories in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) reversed sharply to the downside in January 2022 after two consequent months of expansion and tumbled by 6.8 mln bbl during the month, or -18.2% MoM. Due to negative monthly dynamics, the volume of the stocks in Cushing in January 2022 again moved well below the lower border of the range for this month of a year over last 5 years. Therefore, the level of stocks in the Cushing storage still remained very depressed from the retrospective point of view. On an annual basis, crude oil inventories in Cushing again delivered a steep decline within the month under review and dried up by 18.2 mln bbl relative to one year ago level, or -37.3% YoY. It was the 10th month in a row of Cushing stocks depletion in yearly terms.

In January 2022, the total floating inventories of crude oil around the globe continued to fluctuate in a tight range around the level of 100.0 mln bbl for the 5th consequent month. During the month under review, the inventories marginally increased by 0.1 mln bbl in compare to the month prior, or +0.1% MoM. Therefore, the offshore oil stockpiles remained well above the average level for this month of a year over last 5 years. Meanwhile, the global floating inventories of crude oil were materially lower in January 2022, comparing to their one year ago level. Thus, the stocks dropped by 16.4 mln bbl relative to the level of January 2021, or -14.0% YoY. The strongest monthly depletion of crude oil stocks that held on floating storages in the month under consideration was exhibited in West Africa. The stockpiles in the region tumbled by 4.6 mln bbl in contrast to the preceding month, or -44.3% MoM, after they reached the highest level on records in December 2021. On the other hand, the most material monthly growth of floating stocks of crude oil in the month of January 2022 was observed in Asia. More exactly, the offshore oil inventories in Asia went up by 3.8 mln bbl in compare to December 2021, or +5.3% MoM, the second month of expansion in a row.

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