This article first appeared in Capital, The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

THERE is only one way to put it — 2021 has been an eventful year for oil and gas prices, after years of underperformance compounded by the pandemic-induced bloodbath at the start of the decade.

For the first time in three years, Brent crude oil prices breached the US$80 per barrel (bbl) mark, while natural gas prices rose more than 150% to the highest in seven years at above US$6 per metric million British thermal unit (MMBtu). In the US, the West Texas Intermediate (WTI) benchmark climbed to its seven-year high of US$83/bbl.

Some oil bulls even forecast that crude oil prices would break US$100/bbl, on the back of sustained demand improvement following inventory drawdowns in 2020 and as global economies lift restrictions, thanks to the global vaccination drive which accelerated in 2021.

Supply shocks in the US and China worsened the crunch. Petrol stations in the UK resorted to rationing their petroleum products, with some being shut down due to depleted supply amid the demand surge.

In addition, renewable energy production was put to the test during the extreme weather conditions, especially in Europe, where pundits say its need for the fossil fuel was underestimated amid the strong push by governments to reduce their carbon footprints.

In Asia, the energy crisis was seen in India, where gas inventory fell to just days and, more recently, in Singapore where wholesale electricity prices skyrocketed by more than 1,200% in just two days in early December.

Data provided by the US Energy Information Administration (EIA) shows that global oil demand outstripped supply throughout much of 2020, with a gap of some 730,000 barrels per day (bpd) at end-November. Inventory drawdown is also expected to continue for the sixth consecutive quarter in 4Q2021.

While Opec+ gradually raised production by over three million bpd this year to cater to improved demand in 2021, the market deemed the restored volumes insufficient in the face of three unexpected events that occurred in September and October, says Yaw Yan Chong, director at Refinitiv Oil Research in Asia.

“Notably, this includes a global power shortage that sent gas and coal prices to record highs, with oil seen as a replacement fuel. At around the same time, hurricanes devastated US oil-producing infrastructure, knocking out 15% to 20% of total output in the Gulf of Mexico, and that will not be fully restored until January 2022.

“Also, around 3Q2021, China decided to curb its production of refined products, limiting both its crude import and product export quotas,” he says in an email response to The Edge.

“This happened as regional demand was improving with countries easing movement restrictions, leading to a supply vacuum for diesel and gasoline, as China is a major exporter, amid peak festive demand in India as well as peak winter demand in Japan, among others.”

However the situation going forward is much more fluid. The Omicron variant has put a lid on prices, just as US production is slated to return while Opec+ continues to increase output — albeit in a more gradual manner.

“Literally overnight, prices tanked by US$10/bbl, sending front-month Brent to under US$75/bbl levels, where they have been since. The sheer rapidity of the price fall suggests that the market was probably overbought when it was at the US$80/bbl level,” says Yaw.

While research agencies agree that supply will likely outstrip demand in 2022, forecasts for demand — still impacted by pandemic issues like international travel restrictions — have diverged following the Omicron variant outbreak.

JPMorgan sees Brent crude touching as high as US$125/bbl in 2022, ahead of Goldman Sachs’ forecast of US$85/bbl. In the coming quarter, Morgan Stanley expects the benchmark to touch US$82.50/bbl, way above the US EIA forecast of US$73/bbl.

The US International Energy Agency (IEA), in its December 2021 Oil Market Report, sees the Americas pumping record levels in 2022, and potentially the same for Saudi Arabia and Russia if the Opec+ cut unwinds fully. “In that case, global supply would soar by 6.4 million bpd next year compared with a 1.5 million bpd rise in 2021,” says IEA.

In the same report, IEA cut its 2022 demand growth forecast by 100,000 bpd to 3.3 million bpd, although it said the Covid-19 resurgence “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-19 waves, not least because of widespread vaccination campaigns,” it said.

Interestingly, Opec has revised upward its demand forecast in 1Q2022 by 1.1 million bpd, partly arising from the delay in 4Q2021 recovery induced by the virus resurgence, with a view that inventory replenishment will support the market.

“The impact of the new Omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage Covid-19 and its related challenges.

“This is in addition to a steady economic outlook in both the advanced and emerging economies,” Opec said in its latest monthly oil market report, where it forecast 2022 demand growth at 4.2 million bpd.

Refinitiv’s Yaw agrees that the Omicron outbreak has been less damaging so far, compared with earlier variants. “By all accounts, the effects of Omicron seem to be mild, with no large-scale death tolls anywhere in the world. If that indeed holds true, then I would expect the market to be balanced at current levels of US$70 to US$75/bbl in the short term, as demand [is expected] to improve over the course of the year,” he says.

However, Yaw points out that much of what happens next year will also depend on China. “Do they extend their policy of limiting output as they have done this year, or do they revert to being major exporters of diesel and gasoline?

“I would expect the world to continue on its road to recovery, with hiccups along the way like the current Omicron outbreak, but taking us to a better place than where we currently are by end-2022,” he says.

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