| Dr. Gil Befman, Chief Economist, and Benyahu Bolotin, Economist, Leumi
Development of the price of oil
The price of oil continued to rise in the last week: the price of type oil rose to about $ 86.06 per barrel at the end of the trading day on 14/01/2021 and the price of a type of barrel rose to about $ 83.82.
This increase occurred despite the spread of the American variant which led to the tightening of restrictions in a number of countries, with an emphasis on China where the administration is pursuing a “zero corona” policy leading to local closures resulting in declining demand. This, along with the recovery of oil production of, after the completion of maintenance work in the country’s largest oil pipeline damaged as a result of the activities of local militias, as well as a recovery of Kazakhstan’s oil production which was damaged following the civil riots.
| Global supply
Continuing with the above, Libya’s oil exports have remained weak in the past week, despite the completion of maintenance work on the country’s largest oil pipeline when according to market estimates, the country has even reached agreements with local militias that have harmed the oil field. This weakness in exports is due in part to the weather which has disrupted the activity of seaports from which the country exports oil. However, this impairment of activity is expected to be temporary.
Oman’s energy minister said that group OPEC+ Does not want the price of oil to rise to $ 100 per barrel, which motivates the continued easing of production quotas by group members. However, the actual production of the group members is lower than the reductions in the production quotas due to the difficulty of some of the members to increase their oil production.
In doing so, it seems that a group OPEC+ Will make its decision to continue the relief in production quotas also in February. And are expected to increase their oil production more than other companies in the group, as they have not yet exhausted their production capacity.
In the opinion of theEIA“The rising trend in oil shale drilling activity is expected to increase U.S. oil production by 2023 to about 12.41 million barrels per day. This level is higher in terms of an overall year than the annual record set in 2019, when U.S. oil production” Reached 12.3 million barrels per day.
However, the increase in output is expected to be gradual andEIA Reduced the estimate for U.S. oil production in 2022 to about 11.8 million barrels per day.
In the US, it decreased in the week ending 7/1/2022 by about 4.6 million barrels and the stock level reached about 413 million barrels, a level that is about 8% lower than the average level in this period in the last five years.
This decrease occurred against the background of a decrease in US oil production from about 11.8 to about 11.7 million barrels per day and despite the increase in net imports due to an increase in gross imports along with a decrease in exports, and despite a decrease in the utilization rate of refineries to about 88.4%.
The oil inventory in the reservoir also declined this week, after rising in recent weeks in contrast to the downward trend in the total oil inventory in the U.S. reservoirs.
Global demand
Demand for car fuel in the U.S. fell in the week ending Jan. 7, from about 8.2 to about 7.9 million barrels a day. Voluntarily on social distance, which reduces the demand for fuel used for transportation.
We estimate that with the passing of the current disease wave, demand is expected to return to the range of 8.9-9.6 million barrels per day. Demand for jet fuel has risen slightly and has remained around the level it has been in recent weeks. However, the continued rise in morbidity is tightening restrictions in a large number of countries, which could lead to a certain and temporary decline in demand for jet fuel in the United States.
Demand for oil products in India increased during 2021 according to market estimates by about 3.7%, after declining in 2020 for the first time in two decades following the long closure that was in the country.
This increase is due, among other things, to a change in consumer preferences some of whom have switched from using public transport to private transport, due to the fear of contracting the corona virus. However, the tightening of restrictions in recent weeks, against the background of the spread of the Omicron variant, has led to a decrease in traffic on Asian roads. This decline in traffic was felt mainly in India and China, where restrictions were tightened in eruption areas, which is expected to lead to a decline in fuel demand in the near term.
| Natural gas economy
US Price (Henry Hub), Continued to rise last week to $ 4.27 perMMBTU. This is against the background of the winter season in which the demand for natural gas, which is also used for domestic heating, is rising alongside the increase in US natural gas exports to Europe, which is facing a gas shortage.
For now, it seems that the natural gas crisis in Europe is not nearing an end, which supports US gas prices some of which are now supplied to Europe. However, with the end of the crisis in Europe, which may be towards the middle of 2022, If the level of inventory in the reserves is higher than the average level in the last five years in the corresponding period.
Recent data suggest that Europe’s natural gas inventory is even lower than market estimates. European natural gas reserves at the beginning of the week were filled with only 56.13% of capacity, which supports the high natural gas prices in Europe.
Extremely low levels were recorded in the following countries: the Netherlands, Spain, Portugal, Austria, Belgium and France. The head of theEIA Accused Russia of harming European economies by not increasing its natural gas supply. In his estimation, Russia can increase its supply by at least a third of its current level, but it maintains its current level of supply despite high gas prices.
| Expect to the medium term
Group OPEC+ Is expected to meet its decision to increase production quotas in February, in accordance with the decision made. Actual output, however, is expected to increase less than the increase in production quotas, as some group members have exhausted their production capacity for the time being. Saudi Arabia and the United Arab Emirates are expected to be the main beneficiaries of the increase in production quotas, as they have not yet exhausted their production capacity.
Should the spread of the corona virus variant omicron variant lead to further tightening of restrictions, which will reduce energy demand and destabilize the market around the current price level, the group could overturn the decision to further increase oil production. This is in line with Saudi Arabia’s current strategy, which allows it to respond surprisingly to market developments, without giving any preliminary hints.
The increase in the export of liquefied natural gas from the USA to Europe has led to a slight increase in the price of gas in the USA (Henry Hub) And on the other hand the decrease in the price of European gas (TTF). This is after the price of natural gas in Europe rose sharply several months ago due to a shortage in the market, which was exacerbated with the decline in Russia’s natural gas exports to Europe due to the failure of the Russian natural gas pipeline. Nord Stream 2.
The severity of the coming winter and the volume of consumption for heating purposes are factors that will have an effect on the volume of gas consumption. Given the low flexibility of gas demand in Europe in relation to price, and at the same time the volume of domestic output in Europe is relatively limited and constant, the solution to natural gas shortages in Europe is mainly based on imports, whether from Russia or the rest of the world. The gas purchased from Russia.
In the event of various difficulties, Russia will operate the gas pipeline Nord Stream To a sufficient extent for Europe, a step that is very important for Russia’s economic activity, this will contribute to a further decline in the price of European natural gas. Falling gas prices in Europe could also lead to declining European demand for liquefied natural gas (LNG) Of the US and in view of the high level of inventories, this may contribute to the fall in the price in the US. Also, operating the gas pipe Nord Stream 2 is expected to prevent the shift of demand from natural gas to oil, so this move may have a moderating effect on oil prices as early as 2022.
Oil futures indicate a certain drop in price in the first half of 2022 and a further drop during 2023. This is probably due to expectations that oil supply will increase in 2022, and there may even be some supply, alongside fears of the Corona virus continuing to affect economic activity.
PDF document: Leumi’s full weekly energy review
The writer is the chief economist of Bank Leumi. The data, information, opinions and forecasts in the review are provided as a service to readers, and do not necessarily reflect the official position of the Bank. They should not be construed as a recommendation or substitute for the reader’s independent discretion, or an offer or invitation to receive offers, or advice for the purchase and / or execution of any investments and / or actions or transactions. Errors may occur in the information and changes may occur. The Bank and / or its subsidiaries and / or its affiliates and / or its controlling shareholders and / or its stakeholders may from time to time have an interest in the information presented in the review, including the financial assets presented therein..