Development of the price of oil
The price of oil has risen in the last week, after falling in recent weeks. The price of BRENT oil rose to about $ 75.15 per barrel at the end of the trading day on 10/12/2021 and the price of a WTI barrel fell to about $ 71.67. This increase occurs against the background of initial data on the impact of the American variant which has not yet led to widespread closures, although some countries have tightened their restrictions to some extent, and after Saudi Arabia raised its oil price to be delivered in January 2022 to its Asian and US customers. Market demand.
Global supply
The OPEC + group, led by Saudi Arabia, has decided to continue with the current production quota easing program and increase the group’s oil supply in December by 400,000 barrels per day. Surprisingly, the group also decided on a similar increase in oil production this coming January. This unexpected decision follows a number of other surprising decisions that Saudi Arabia has made in the past two years. Which suggests that Saudi Arabia’s strategy is to preserve for itself the ability to surprise and make quick decisions. The group even hinted that it might adjust its decisions immediately, in line with market developments and the impact of variant Omicron on demand.
The International Energy Forum convened recently and emphasized the lack of sufficient investment in energy which could lead to excess demand in the second half of the decade. This decrease in investment is due to the expected long-term transition to green energy and due to the spread of the corona virus which has affected economic activity in the shorter term. However, demand by the end of the decade is expected to be high, so if investment does not increase, energy prices could rise significantly in the coming years. The forum estimates that investments in oil and natural gas production should be increased to about $ 523 billion a year by the end of the decade, in order to meet expected demand. The factors working for potential shortages are reflected in the fact that the number of active drillings in the world, and in the United States in particular, is lower than it was in the past at the current level of oil prices.
The Mexican government has announced a plan to rescue the state-owned oil company Pemex, which is in financial difficulties, and to raise capital through the issuance of $ 700 million to $ 1 billion bonds. This, after the government poured $ 3.5 billion into the company so that it could pay its debts to the bondholders and begin the process of buying the bonds back. In doing so, the government indicates its intention to continue to maintain the government energy company and back up its operations.
In the week ending December 3, 2021, US oil inventories decreased by 0.2 million barrels. This decrease occurred despite the increase in net imports, which was due to the decrease in oil exports more than the decrease in gross oil imports and the increase in the utilization rate of refineries at the point The percentage to 89.8%. On the other hand, the oil inventory in the Cushing reservoir continued to rise and reached over 30 million barrels. Go up as well.
US oil production continued to rise gradually to about 11.7 million barrels per day, but this level is significantly lower than the pre-crisis peak level. This slow growth is due to low investment in the US energy industry against the background of the crisis that led to a sharp drop in oil prices in 2020 And reduced the viability of investments alongside the lack of certainty in the market resulting from the continued spread of the virus. At the same time, in the American energy industry the uncertainty is even greater due to regulatory risk arising from the fact that the US President opposes the expansion of the US energy industry for reasons of environmental protection. The large funding burden imposed on U.S. oil companies, which are private sector companies, is also very burdensome and contributes to a significant increase in the balancing price of oil which will justify production, all beyond the marginal cost of production itself. As a result, American oil producers do not Have made large investments in the last two years, making it difficult for them to increase supply sufficiently to meet demand.
Global demand
Demand for US car fuel rose slightly in the week ending December 3, but remained below 9 million barrels a day. Concerns about the spread of the coronavirus omicron variant. The continued spread of the virus is expected to hamper the recovery in demand and support the US administration’s efforts to lower the price of fuel to the consumer. Demand for jet fuel has been on the rise since the second half of 2020 and since the beginning of the third quarter of the year it has been in the range of about 1.3-1.8 million barrels per day. However, in the week ending December 3, demand for jet fuel fell sharply from about 1.7 to about 1.2 million barrels a day. This is due to the spread of the American variant which has led to the tightening of restrictions in some countries. The limitation is mainly on those entering the country from other countries, most often on intercontinental flights that consume a lot of fuel. If the tightening of restrictions continues, the demand for flights is expected to decrease and as a result the demand for jet fuel may fall further.
Demand for aviation in Europe has fallen below the level it has been in recent weeks and traffic data on the toll roads of Italy, Spain and France indicate a similar trend in land transport as well. The decline in demand for flights in Austria was stronger, due to the closure imposed in the country. This is against the background of rising morbidity in Europe, which together with the United States are the main focus of morbidity, which has led to the tightening of restrictions in some countries.
China’s oil imports in November rose by about 11% (m / m) to about 10.21 million barrels per day and reached the highest level in the last three months. This, after the administration granted new import quotas to the private refineries. Imports are expected to remain high in order to prevent an energy crisis in the country.
The natural gas economy
The price of natural gas in the US (Henry Hub) continued to fall last week and reached $ 3.79 per MMBTU. Some as an alternative to natural gas. Inventory levels in reservoirs have begun the cyclical phase in which inventories are depleted. This trend is expected to continue until March, as inventories are depleted in the winter months and filled in the spring and summer months.
The price of European gas (TTF) has risen in the past week, despite rising morbidity in Europe’s major economies, indicating that energy shortages are still significantly affecting the European gas market and its impact is even stronger than the impact of rising morbidity concerns. However, if a corona virus variant omicron turns out to be dangerous and will lead to widespread restrictions that will affect the industry, this is likely to have a moderating effect on the price of European gas.
Expect medium-term
The OPEC + group is expected to increase oil production in January, in accordance with the decision made, if the oil market remains stable, but it may avoid further relief in quotas in February if it fears the market will be in excess supply which will jeopardize its stability. Also, if the expansion of the Omicron variant tightens the restrictions that will reduce energy demand and destabilize the market, it could overturn the decision to further increase production in early 2022. This is in line with Saudi Arabia’s current strategy to respond immediately to market developments, without providing Preliminary hints.
Such restrictions may also lead to a certain decrease in the price of natural gas, with an emphasis on the price of European natural gas (TTF) which has risen sharply in recent months due to its shortage, but is expected to remain high until this problem is resolved. If Russia operates the Nord Steam 2 gas pipeline sufficiently to Europe, this will reduce the price there and prevent the shift of demand from natural gas to oil, with the potential for a moderating effect on oil prices as early as the first half of 2022.
At the same time, the expected reduction in the Fed’s asset purchases may further strengthen the dollar, which also supports the decline in the price of oil in the medium term. Futures contracts point to 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.
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