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Oil Market Report - January 2022

EXECUTIVE SUMMARY

Crude oil prices declined in December 2021 for the second consecutive month on a monthly average basis, falling further from multiyear highs registered in October 2021, amid persistent market volatility that remained fuelled by rising uncertainty regarding the impact of the rapid spread of the Omicron variant and its effect on the global economy and oil demand. Uncertainties about the effectiveness of available vaccines against Omicron and a warning from the World Health Organization stating that “the overall risk related to the new variant of concern Omicron remains very high” added worries to the oil market. On a monthly average, ICE Brent and NYMEX WTI near-month futures contracts declined by 7.5% and 8.8% respectively in December 2021, recording their largest monthly loss since April 2020.

Oil prices came under further downward pressure after some countries introduced stricter mobility restrictions, especially in Europe, while in China the government imposed a lockdown on a major city of 13 million people. Moreover, relatively warm temperatures in the early days of winter in some northern hemisphere countries ‒ including the US ‒ cooled optimistic expectations regarding gas-to-liquids switching. Also, some agencies lowered their 2021 and 2022 global oil demand growth forecasts last month. A signal from the US Federal Reserve Chairman in early December on the potential end of the asset purchase programme from the central bank sooner than expected, and the ongoing high value of the US dollar in December compared with previous months, also weighed on market sentiment.

However, oil prices pared some losses in the last ten days of December, as fears of a large negative impact by the Omicron variant on oil demand eased amid signs of sustained demand in major oil-consuming countries. Mobility data showed a further recovery in some Asian and Latin American countries, while in Europe and the US mobility indices showed resilient seasonal levels, remaining well above last year's figures. Oil prices were also supported by supply outages in several regions, including declarations of force majeure in Ecuador and Libya.

Positive sentiment on the crude oil market has only intensified after the start of the year with oil futures posted a fourth straight weekly gain, the longest winning streak since October 2021, on signs that the market is tightening as global consumption withstands the impact of the Omicron virus variant. Depleting U.S. inventories and petroleum product demand at multiyear highs also provided grounds for the rally in oil prices. An additional support for the market in early January 2022 was received after Saudi Arabian Energy Minister appeared unconcerned about the rise in oil prices, which does not point to any more pronounced expansion of oil production by the Organization of the Petroleum Exporting Countries and their allies, or OPEC+. Considerable growth of geopolitical risks in the FSU space, firstly due to rebel attack in Kazakhstan and later due to NATO / Russia clash surrounding Ukraine gave more steam to the bulls on the oil market as well. In result, crude oil prices settled at their highest level since 2014 during the third week of January 2022, with further geopolitical tensions in focus after an attack on an Abu Dhabi oil facility by Iran-backed Houthi rebels from Yemen that killed people and caused a fire at the capital of U.A.E.’s international airport. So, Goldman Sachs warned that "surprisingly large" supply deficits could see Brent prices top $100 a barrel this year.

All in all, both ICE Brent and NYMEX WTI benchmarks ended the period under report with a remarkable growth. The ICE Brent front-month futures contract skyrocketed since December 20, 2021 by as much as $16.5 / bbl, or dramatic +23.1%, and the NYMEX WTI nearest contract exploded by $17.6 / bbl, or +25.6% over the same period of time.

In December 2021, total crude oil output of the OPEC continued to grow and ramped up by another 90 thsd bbl / d in contrast to the volume of the previous month, or +0.3% MoM. Although the production of the cartel kept on to expand on a monthly basis throughout the 8th consequent month, it was the smallest rise over this period, despite the OPEC+ agreed to increase its production in December by another 400 thsd bbl / d in accordance with the policy of gradual reduction of the COVID-related supply cuts. Nevertheless, the production in the OPEC ran to its new marginal maximum mark since April 2020 equal to 28.09 mln bbl / d. However, on an annual basis, the output of crude oil by OPEC states still demonstrated very profound growth and went up in December 2021 by 2.61 mln bbl / d relative to December 2020, or +10.2% YoY. In yearly terms, the output continued to increase within the 8th consequent month as well. The most significant monthly rise of the crude oil output within the cartel was exhibited in Saudi Arabia, where the production built up by 150 thsd bbl / d as against the month prior, or +1.5%MoM. The oil production in Saudi Arabia also exhibited an increase over consequent 8 months and rose to its new highest level slightly above 10.0 mln bbl / d since April 2020.

The OPEC again agreed to continue its strategy of gradual removing of supply cuts on the 24th OPEC and non-OPEC Ministerial Meeting that was held on January 4, 2022. The Meeting 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 February 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, in fact, the Meeting was again non-event. The next 25th OPEC+ meeting is scheduled for February 2, 2022.

The total production of oil around the globe slightly decreased in December 2021 as against the volume of November 2021 after three months of expansion in a row. The decline was equal to just 97 thsd bbl / d, or insignificant -0.1% MoM. Moreover, the growth in November was also revised to the downside to just +0.5% MoM instead of the initial estimate of +1.2% MoM. So, the volume of the global oil production was somewhat below the level of 99.0 mln, though very close to its highest level since April 2020. On an annual basis, the global oil production, on the contrary, still exhibited a solid expansion within the month under consideration and went up by 5.23 mln bbl / d relative to the volume of December 2020, or +5.6% YoY. It was the 9th consequent month of a global oil production expansion in yearly terms. As against the pandemic through, recorded in May 2020, the production of oil around the globe was higher in December 2021 by roughly 10.0 mln bbl / d, or +11.4%. Non-OPEC states as a whole demonstrated negative monthly dynamics of their oil production in December 2021. However, only three countries were responsible for the tangible monthly drop of the overall non-OPEC production, namely Ecuador, Brazil and the US. Both on absolute and relative bases, the most severe monthly drop of oil output in December 2021 was recorded in Ecuador, as the country slashed its crude production in the middle of the months to just around 12% of normal after advancing riverbed erosion driven by heavy rains forced the closure of its two export pipelines. In result, the oil output in Ecuador in December plunged by nearly 200 thsd bbl / d relative to the volume of November, or more than 40% MoM, to its lowest level since April 2020, when the same problem led to the similar stoppage of the oil export. Brazil also exhibited a formidable decline of its oil production in the month under review. The production in Brazil shrank in December 2021 by 168 thsd bbl / d relative to one month ago level, or almost -5.0% MoM. The oil production in Brazil continued to fall throughout consequent 5 months, but this prolonged decline is mainly attributed to the seasonal pattern of the production. The same time, the oil production in the USA shrank in December 2021 by 152 thsd bbl / d in compare to the month prior, or -0.8% MoM.

Primary domestic oil production in the US, counted as the sum of crude oil output and NGLs production, proceeded to expand in December 2021 on a monthly basis, according to the weekly US DOE data, though the dynamics of the overall oil output in the country during the month was negative. The primary US output increased in December by 197 thsd bbl / d relative to the volume of November, or +1.2% MoM. The production expanded for the third consequent month and ramped up to new its peak volume of 17.27 mln bbl / d since April 2020. The volume of the primary domestic oil output in the US still remained somewhat lower comparing to the pre-pandemic level of February 2020, but the gap narrowed to marginal values. More exactly, it was equal to just 87 thsd bbl / d as of the end of the month under review, or just 0.5%. Therefore, literally speaking, the primary domestic oil production in the US has finally recovered completely to its pre-pandemic levels. On a year-over-year basis, the primary oil production in the country expanded considerably in December 2021 as well, similar to several preceding months. The growth over last 12 months was equal to 931 thsd bbl / d, or +5.7% YoY. The primary output in the USA continued to grow in yearly terms in the course of consequent 8 months.

Total output of shale oil in the US continued to grow in December 2021 for the 10th consequent month and increased further by 57 thsd bbl / d in contrast to the volume of the previous month, or +0.7% MoM. Therefore, the output rose to its new maximum level since March 2020 equal to 8.73 mln bbl / d. The gap between the current level and the pre-pandemic level narrowed to 570 thsd bbl / d. In yearly terms, the output of shale oil in the US went up in December 2021 more considerably and grew by 827 thsd bbl / d, or solid +10.5% YoY. From a point of view of annual dynamics, the production exhibited an increase throughout 8 months in a row. All the shale oil deposits in the US demonstrated an increase of their output in December 2021 by comparison with November 2021, except for Bakken. The most essential expansion of the production of shale oil in the month under consideration was exhibited in the Permian field, where the output showed a growth of 61 thsd bbl / d, or +1.2% MoM. The shale oil production on the deposit experienced an expansion throughout 10 months in a row, and rose in December 2021 to its new peak print of 5.11 mln bbl / d on records.

According to the most recent IEA monthly report, although the number of Omicron cases is surging worldwide, oil demand defied expectations in 4Q21, rising by 1.1 mln bbl / d to 99 mln bbl / d. In 1Q22, demand is set for a seasonal decline, exacerbated by more teleworking and less air travel. Nevertheless, the IEA had raised its global demand estimates by 200 thsd bbl / d for 2021 and 2022 – resulting in growth of 5.5 mln bbl / d and 3.3 mln bbl / d, respectively, – due to softer COVID-19 restrictions.

Conversely to the preliminary estimates, total commercial stocks of crude oil and petroleum products in OECD states barely changed in October 2021 in comparison with September 2021 after 4 months of depletion in row. The volume of the stocks increased insignificantly by roughly 0.1 mln bbl over the month, or less than +0.1% MoM. It means that the inventories remained at their new lowest level since early 2015 and, therefore, 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 again was much lower in October 2021 as against October 2020. The yearly drop was equal to a sizeable amount of 365.3 mln bbl, or -11.7% YoY. According the preliminary IEA assessments, OECD total crude oil and petroleum products stocks declined by another 6.1 mln bbl in November 2021 as compared to October 2021, as rising crude and gasoline stocks were more than offset by draws in other products. At 2.756 bn bbl, stocks were down 354 mln bbl on a year ago and at their lowest level in seven years. Early IEA data for December 2021 show OECD total crude oil and petroleum products stocks falling by another 45 mln bbl while volumes of oil on the water rose.

Total stockpiles of crude oil and petroleum products in the USA went up in December 2021 by 5.1 mln bbl relative to November 2021, or +0.7% MoM, for the second month in a row. The volume of the stocks rose to its highest level over last 4 month, though it still remained rather close to the lowest level over recent 3 years. In annual terms, total inventories of crude oil and petroleum products in the USA in December 2021 again were much lower than they were one year ago. The drop over last 12 months in December 2021 was equal to 104.6 mln bbl, or -11.9% YoY. The inventories continued to deplete in yearly terms for 9 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 December 2021 by nearly 186.7 mln bbl, or nearly 20%.

Crude oil inventories in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) continued to grow in December 2021 on a monthly basis for the 2nd month in a row after 12 months of constant depletion. In December 2021, the stocks in Cushing jumped by 8.8 mln bbl relative to the month prior, or shocking +30.7% MoM. It was the most rapid monthly expansion of the stockpiles for more than a year. Moreover, the rate of growth was equal to 2.67 SD of monthly growth rates over the history. Despite to robust growth of the inventories in Cushing during recent two months, their volume rose in December 2021 only to the lower border of the range for this month of a year over last 5 years. So, the level of stocks in Cushing remained very depressed 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 21.1 mln bbl relative to one year ago level, or -36.1% YoY. December 2021 was the 9th 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 in a tight range close to the level of 105 mln bbl in December 2021 for the 4th consequent month. During the month under review, the inventories expanded by 0.6 mln bbl in compare to the month prior, or +0.5% MoM. So, the stockpiles climbed to their new highest level over last 8 months and, therefore, remained well above the average level for this month of a year over last 5 years. Contrarily to some preceding months, global floating inventories of crude oil demonstrated a solid growth in December 2021 in annual terms. More exactly, the stocks expanded by 10.0 mln bbl relative to one year ago level, or +10.6% YoY, the first positive annual change of the indicator over last 9 months. Similar to the previous months, despite to the humble monthly change of the overall global stockpiles, dynamics of crude oil floating inventories in different regions of the world in December 2021 was more pronounced. The most considerable monthly growth of crude oil stocks that held on floating storages in December 2021 was observed in Asia, where the inventories expanded by 8.0 mln bbl in contrast to the volume of the previous month, or +11.9% MoM. The share of Asia in global floating inventories of crude oil improved within the month by more than 1000 bps MoM to 71.4% of the global floating crude oil inventories. In West Africa, crude oil stockpiles that held on floating storages showed a growth of 2.4 mln bbl in December 2021 versus November 2021, or +25.5% MoM. It was the fourth consequent month of expansion of the inventories in the region. Moreover, the floating stocks in West Africa ran within the month to its maximum level of 11.60 mln bbl during the whole history of observations. Due to the solid monthly growth, the share of West Africa in global floating stockpiles widened in December 2021 by impressive 510 bps to 11.1% of the global figure. So, the region moved up two notches and took the second place in the ranking of the regions with the largest floating inventories of crude oil. On the other hand, the most material absolute contraction of crude oil inventories that held on floating storages in December 2021 was exhibited in the Middle East Gulf. The volume of the stockpiles in the region dried up by 3.1 mln bbl as against the volume of November 2021, or -35.2% MoM. All in all, the Middle East Gulf moved down two notches in the ranking of largest holder of oil floating stocks in the world and dropped to the fourth place. Region’s share weakened over the last month by 560 bps and crushed to 5.4% as of the end of the month under consideration.

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