Surges in prices of Brent Crude oil, the international benchmark for global oil purchasers, have led to 7-year highs with price increases of over 13% between the start of 2022 and mid-January 2022. The price of 88.13 USD per barrel on 18th January 2022 is the highest since October 2014 albeit still much lower than the all-time high of 147.50 USD in July of 2008. Rising tensions across the global stage, with insurgent attacks in the UAE, Russia’s hostility against Ukraine and the US’s and China’s fears over inflation in combination with constrained supply are all contributing to this price surge.
The Organization of the Petroleum Exporting Countries along with other large oil producers such as Russia, known collectively as OPEC+, control over half of the global supplies and 90% of known deposits. Having agreed to cut their output by 9.7 million barrels per day, around 10% of global production, during the peak of Covid in April 2020 OPEC+ is slowly starting to ramp up production once more with an agreed increase of 400,000 barrels per day planned for February 2022, as has been the case every month since August 2021. However, many countries have been struggling to ramp up production with OPEC output only increasing by 90,000 barrels per day in December 2021. The limited supply largely due to investment constraints and internal instability has not been able to meet demand, which remains unwavering despite rising COVID-19 cases globally.
Militia blockades of four oil fields in Libya in December of last year as well as shutdowns to critical pipelines in need of maintenance dropped its crude oil output down to around 780,000 barrels per day. According to Libya’s Minister of Oil and Gas output has since been restored to 1.2 million barrels per day with plans to reach 2 million barrels per day before the end of the year. Oil and gas supermajor Royal Dutch Shell Plc announced difficulties with loading crude oil shipments at several of its terminals in Nigeria with underinvestment and poor infrastructure severely limiting production.
Political and military tensions have also plagued the Middle East as a drone attack by Yemeni Houthi rebels in the UAE blew up three fuel tankers and left an oil plant damaged in Abu Dhabi. Instability in the region, a recurring issue over the last few decades, may result in some of the biggest crude oil producers in the world adding their name to the list of countries struggling to meet OPEC+’s rising production targets.
Even Russia, a country where the oil and gas share of GDP was around 15.2% in 2020 albeit down from 21.2% in 2018 according to the Federal Service for State Statistics (Rosstat), is unlikely to meet targets over the next six months. Supply has fallen short of the target to add 100,000 barrels per day every month to its production and looks set to remain that way with Russian oil wells being relatively slow to restart production post-COVID-19. According to the Bank of America Corporation Analysts polled by media conglomerate Bloomberg L.P. Russia’s monthly increases are highly unlikely to bypass 60,000 barrels per day over the first half of the 2022 year. With indication that the majority of the country’s oil wells are back in production and that new wells would be needed to significantly boost total production, it seems unlikely that Deputy Prime Minister Alexander Novak’s goal of restoring oil production by 85% in 2022 from its COVID-19 trough is feasible. Additionally, political tensions between Russia and NATO over the possibility of a conflict in Ukraine further increases uncertainty over Russian supplies, especially following Russia’s willingness to let energy prices soar in Europe at the end of 2021.
The rallying of oil prices, typically a major contributor to inflation, has attracted the intention of the world’s two biggest oil consumers, the US and China respectively. With the US currently facing 39-year high inflation of 7% and China’s reliance on oil prices for its industrial sector, it is of no surprise that the countries intend to intervene in the market. China has agreed to release oil reserves around the Lunar New Year in early February in a bid to reduce oil prices. This coordinated strategy follows a similar policy by the US from November last year whereby the U.S. Department of Energy released 50 million barrels from its Strategic Petroleum Reserve. Although such efforts may offer temporary setbacks in oil prices underlying supply issues must be addressed in order for long term changes and trends to be created.
Bringing back output has proved to be much harder than expected as a result of the wide range of issues affecting many oil-producing countries, in particular those part of OPEC+, including underinvestment, regional instability and time lags. Temporary releases of oil reserves or small increases in production will not be sufficient to generate long term change and meet resurging demand and consequently, the rally on crude oil seen so far in 2022 is likely to continue unless major changes come into effect.
By: Jeremy Toussaint
Sector Head: Eric Hardy