| 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 $ 88.18 per barrel at the end of the trading day on 21/01/2021 and the price of a type of barrel rose to about $ 87.49, the highest level since 2014.
This increase occurred against the background of China’s extensive monetary support for economic activity, in order to minimize the economic damage resulting from the country’s zero corona “policy.
| Global supply
Group Ofek Estimates that the market will remain stable against the background of strong demand for oil, this with the continued recovery of economic activity, which is expected to allow the group to continue easing production quotas. In her estimation, the increase in morbidity due to the spread of the omicron variant is expected to be moderate and temporary.
Later this year, demand is expected to remain strong, despite expectations of tightening monetary policy, which will support the oil market. Market stability is also expected to be supported by low inventory levels in oil reserves.
As stated, this assessment is expected to support the continuation of the current policy of the facilitation gradually the production quotas of the companies in the group. However, some of the group’s member states did not realize the increase in production quotas, due to low capital investments during the Corona crisis, along with civil riots by some of the group’s members, which hampered their ability to increase oil production capacity.
To illustrate, oil production has recently risen to 1.2 million barrels per day. This, after the maintenance work on the oil pipeline that was damaged by operations by local rebels was completed, an operation that reduced oil production to about 700,000 barrels per day, and also after the return of the recently disrupted activity in the seaport.
These events are repeated frequently, which calls into question Libya’s ability to meet its production targets over time.
In this situation, the Arabs are the main companies whose oil production capacity remains high and they, along with a number of other oil producers in the Middle East, are expected to be the main beneficiaries of the continued policy of easing production quotas and increasing oil production.
At the same time, it increased oil and gas production Condensate And petrochemical products in the last ten months significantly. Much of Iranian oil and distillates are sold in the “black market” and China appears to have increased its energy purchases from Iran.
This increase in oil production has led Tehran lawmakers to take into account sales of 1.2 million barrels of oil per day, which could give a certain estimate to Iran’s ability to produce oil and even export its share despite existing sanctions. However, this assessment seems to reflect legislators’ expectations about the chances of reaching a nuclear deal with the US during the year, which will gradually remove economic sanctions from it and allow it to officially export oil.
Rose in the week ending 14/1/2022 by about 0.5 million barrels, but the level has remained about 8% lower than the average level at this time of year for the past five years. This increase occurred along with a slight decrease in the utilization rate of the refineries to approximately 88.1% and a balance in net imports.
On the other hand, the oil inventory in the reservoir decreased this week, the second week of declines after it has risen consistently from the second half of November 2021.
Basin oil production Permian Rose in December and reached a new high of about 4.2 million barrels per day. This increase is due to an increase in the output of the oil shale in the area. In the opinion of theEIA, Oil production is expected to continue to rise in the next two months, and in February oil production in the region is expected to be more than 5 million barrels per day.
As long as oil prices remain high, oil shale output is expected to remain high and even rise. However, the cost of producing oil in this way is expensive and the producing companies have a large financial burden that they have to serve, so that if oil prices fall, the oil production of oil shale producers is expected to decrease.
Global demand
Demand for car fuel in the U.S. rose again in the week ending Jan. 14 to about 8.2 million barrels a day, after two weeks of sharp declines in late 2021 and early 2022, but remains below its range during most of the second half of 2021.
The sharp declines in demand occurred against the backdrop of the spread of the Corona virus omicron variant that led to voluntary maintenance of social remoteness which reduced transportation use, alongside rising fuel prices that hurt household demand. In our estimation, demand is expected to continue to rise, especially after the current wave of morbidity has passed, returning to a range of 8.9-9.6 million barrels per day. Demand for jet fuel has dropped slightly, but it has remained around the level it has been in recent weeks.
Demand for jet fuel in Europe has begun to rise, after demand for flights appears to be rising against the backdrop of continued economic activity alongside the spread of the corona virus variant omicron.
In Asia, the price of jet fuel has risen to its highest level since 2018, indicating an increase in demand for flights. However, the recovery in demand for flights in Asia is slower than elsewhere in the world and the number of international flights in Asia is about 21% lower than the level that was before the spread of the corona virus.
In India, fuel demand has declined in early 2022, amid rising morbidity in the country and led to a decline in road traffic. During the first half of January, daily fuel and diesel sales fell by about 14% compared to December 2021.
Fuel and diesel consumption in India, which is the third largest oil consumer in the world, accounts for more than half of the country’s oil products consumption, which could indicate a slowdown in global oil demand.
| Natural gas economy
US Price (Henry Hub) Remained volatile and dropped last week to $ 3.80 perMMBTU. This is against the background of the mild weather which has reduced the demand for natural gas in favor of heating homes, along with an inventory level that is 1.2% higher than the average during this period in the last five years.
Gas prices in Europe () have remained stable over the past week, following very high volatility in the second half of 2021 with an emphasis on December, and the price remains in the range of 80-85 Euros perMWh.
These prices are significantly higher than the historical level, due to the shortage of natural gas in the European market and the low inventory levels in the gas reserves there after Russia reduced its natural gas supply to Europe. These high gas prices also support the US gas price, as some of it is supplied to Europe as liquefied natural gas (LNG).
The escalation of tensions between Russia and Ukraine raises the possibility that the natural gas crisis will continue in the near future and that it will take time for the price of European natural gas to return to the historic level environment. We estimate that the price of European natural gas will remain high during the first quarter of the year and it is possible that by the second half of 2022 the gas shortage will decrease, provided that tensions between Russia and Ukraine decrease and that the EU and German regulators approve the operation of the Russian gas pipeline. Nord Stream 2.
For now, Germany is choosing not to intervene in the conflict in Eastern Europe, even at the cost of internal disagreements in NATO, which could help it operate the Russian natural gas pipeline if tensions subside. , Which will also include some damage to the operation of the gas pipeline Nord Stream 2, Which will lead to the maintenance of high natural gas prices in the near term until a suitable alternative is found or until order is restored.
| Expect to the medium term
Group OPEC + It 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.
It seems that the rise in morbidity in the current wave has not materially hurt demand, which supports the policy of OPEC + To facilitate production quotas. However, if the spread of variants of the virus leads to further tightening of further restrictions, which will reduce energy demand and destabilize the market around the current price level, the group can cancel the decision to further increase oil production.
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 the expectation that oil supply will increase in 2022, and there may even be a certain excess supply, along with the tightening of monetary policy in many countries.
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 to purchase and / or make 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 companies related to it and / or the controlling shareholders and / or stakeholders in which of them may from time to time have an interest in the information presented in the review, including financial assets presented in it.