Development of the price of oil
The halting of the rising trend in oil prices continued in the past week as well. The price of BRENT oil has not changed significantly in the last week and it remained at a level of about $ 82.50 per barrel at the end of the trading day on 12/11/2021 and the price of a WTI barrel fell to about $ 80.79. This, after the OPEC + group decided to continue the easing of production quotas in accordance with the current agreement, and not beyond that, and on the other hand the USA said that it would examine measures of action in order to meet the high demands in the market.
Global supply
OPEC’s oil production rose 217,000 barrels per day in October to 27,453 million barrels per day. This increase is lower than the increase in production quotas of OPEC members as agreed in the OPEC + agreement, which indicates that some of the group’s member states, especially in Africa, are having difficulty raising their oil production.
Saudi Arabia has raised the premium on its oil to be delivered to its customers in Asia in December more than expected, suggesting that it is expected to lead the current OPEC + line and continue easing production quotas in line with the current agreement, and not beyond. This is despite pressure from the US and other oil importers to increase the group’s oil output more than the current agreement in order to meet market demand. Despite the increase in premiums, Asian customers are expected to seek to purchase all the usual amount of oil, with an emphasis on lighter type oil as it is better for distillation production, due to the demand for distillates which are expected to remain high with economic activity recovering in Asian countries. Refineries.
The Iraqi oil minister said the OPEC + group focuses on ensuring a steady supply of oil to global markets and is not targeting a specific oil price. He added that the group aims to increase oil output by 400,000 barrels per day and in the first quarter of 2022 it will re-examine the rate of increase in output. This is against the background of pressure from the US and other oil importers to increase oil production more than the current OPEC + agreement.
In the week ending 5/11/2021, U.S. oil inventories rose by about a million barrels. This increase occurred after the previous two weeks in which inventories also rose and thus reached the highest level since August. However, the inventory level remained low at about 7 % On average this season over the past five years.This increase occurred despite the decrease in net imports, which was due to the continued reduction in gross imports along with the expansion of exports, and the increase in the utilization rate of refineries to 86.7%. Go down a bit and it is approaching 26 million barrels. Also, U.S. fuel and distillate inventories have also declined, due to high market demand. U.S. oil production is rising very slowly and the administration is releasing little oil from the strategic reservoir. The release of oil from strategic inventory during President Biden’s tenure, amounting to about 30 million barrels, is equivalent to at least two days of average US daily oil consumption (consumption of about 20 million barrels per day).
Actual developments in output and inventory are still inconsistent with the statements of President Biden, who said that if the OPEC + group does not increase oil production more than the original agreement, it will respond to meet market demand. After the OPEC + group did not respond to his request, the administration said it continues to examine the tools at its disposal to prevent the rise in consumer fuel prices. One possible way for the administration to curb the price increase is by supplying oil from the strategic reservoirs that will meet existing demand, which as stated is not happening yet. Despite this administration’s concern about inflationary pressures and high fuel prices, U.S. refinery fuel exports have recently risen to 802,000 barrels per day, the highest level since 2018. This continued increase in exports may limit the impact of U.S. administration intervention in supply In such a situation, of increased exports of crude oil and distillates, the administration will also supply more oil from the strategic reservoirs, it is likely that some of the distillates refined from this oil will be exported to other countries, and not only to the US market.
The possibility that the US administration will restrict oil exports and distillates also exists. However, such a move could further hurt the incentives of U.S. oil producers, so that eventually oil production in the US may shrink and supply in the market decrease. The countries that import oil, and increase international tensions due to high global demand for oil. For now, it seems that the administration will not take such a step, especially given the estimates that global energy shortages are temporary Also easing the price to the consumer.Also imposing a ban on energy exports could exacerbate political tensions in the US, further weaken confidence in them, strengthen the power of Republicans and may even lead some Democratic Party members to oppose some of the administration’s moves, which could jeopardize The transfer of Biden’s investment plan Build Back Better.
Global demand
Demand for US car fuel fell slightly in the week ending Nov. 5 to 9.3 million barrels a day, but it remains at the high level it has been in recent weeks. Rising in recent months, has also fallen slightly below 1.6 million barrels per day and has stabilized in recent weeks around the near-peak level since the spread of the corona virus. At a slower pace compared to the demand for distillates in other industries.
The recovery in distillate demand in the aviation industry is slow in other parts of the world as well. According to market estimates, air traffic in Europe is about 20% lower compared to the same period in 2019, indicating that in Europe as well, aviation is recovering slowly.
Booking flights from China to destinations around the world has dropped recently, amid limitations stemming from the spread of the corona virus in a number of European countries which have slowed down demand for flights. This decline has brought the number of flights from China to a level 23% lower than it was in the same period in 2019, before the spread of the virus, and it indicates a reduction in demand for aircraft fuel.
The tourism industry is expected to continue to recover in 2022, which is expected to increase demand for jet fuel, along with a continued increase in demand for fuels used for transportation and demand for oil in industry as the recovery in global activity continues. These strong demands are expected to reduce to some extent the excess supply expected to be in the market next year.
China’s oil imports fell in October by about 8% (m / m) to about 8.9 million barrels a day, the lowest level in three years. This, against the background of a delay in the issuance of import quotas to the country’s independent refineries, which limited their oil purchases. China, on the other hand, has issued limited quotas for fuel exports, which are estimated to be 36% lower this year than in 2020. In order to increase the supply of fuels in the domestic market in an attempt to alleviate the existing shortage.
The natural gas economy
The price of natural gas in the United States (Henry Hub) has dropped to $ 5.13 per MMBTU in the past week, but is still at a significantly higher level than it has been in the market in recent years. The coming winter season, which is expected to increase demand for natural gas for domestic and business heating, and the low inventories in natural gas reservoirs.This decline occurred after the gap between the current level and the average natural gas inventory in underground reservoirs over the past five years narrowed to 2.7%.
In Europe, the price of natural gas has risen again since early November, after falling in October, following internalization in the markets, as we estimated that Russia is not sufficiently increasing its natural gas exports to Europe through the old, EU-approved gas pipelines passing through Eastern European countries. This is despite the promise of the President of Russia to increase the supply of oil to Europe through the existing pipelines and not to use Europe’s dependence on Russian natural gas in order to bring achievements. Russia is trying to pressure the EU to expedite the approval of the use of the Nord Stream 2 natural gas pipeline and it even said that it could increase the supply of oil to Europe with the start of the use of this pipeline.
Expect medium-term
The price of high natural gas is expected to continue to divert demand for oil in the near term, which will support high oil prices and may even lead to a further increase, especially if supply does not increase accordingly by OPEC + or US. In the medium term, To decline, particularly against the background of the expected increase in OPEC + and US oil production.
The price of oil will be determined in the near future mainly in accordance with OPEC +’s policy regarding the regulation of supply in the market. This is because the group of major US oil producers, OPEC +’s major competitor, has reduced capital investments for financial reasons, preventing them from being able to increase their oil production rapidly because the increase in US oil production is based on private oil companies.
In our estimation, the OPEC + group will continue to increase oil production in accordance with the current agreement until early 2022, but there may be a further increase in oil production in early 2022, especially if it turns out that the expected supply surplus next year is smaller than forecast. It is likely that by the end of the year oil prices will remain high and the price drop will only be during 2022. If the event of natural gas shortages is not resolved in the coming months, then the drop in oil prices will be in the second half of 2022. And it will supply enough gas to Europe which will reduce the price there and prevent the shift of demand for natural gas to oil, then there seems to be a greater likelihood that prices will fall as early as the first half of 2022.
Alongside all this, the rise in morbidity in Europe and the tightening of restrictions in hotspots raise the fear of disruption of economic activity that could lead to a decline in demand for oil. If the expansion expands and more countries tighten the restrictions, then the recovery of economic activity is expected to slow down, which could lead to a drop in oil and natural gas prices. This risk may increase if an even more deadly, contagious, and to some extent resistant to vaccines spread. Also, the expected decline in Fed asset purchases may strengthen the dollar, which also supports a drop in the medium-term oil price.
Futures contracts indicate that oil prices are expected to remain stable until the end of the year and are expected to fall over the next year. This is probably due to the expectations of an increase in global oil production in the medium term.
Changes in US monetary policy may later affect the price of oil. Rising real interest rates on growth and demand Beyond that, there has been a gap, for several months, between the actual route of the rising oil price and the route of the price of oil implied by the strengthening of the world dollar, which in the past should have led to a weakening oil price. Normalization of oil supply may allow this gap to close, and as long as the dollar remains relatively strong, this may support future oil prices.
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