The average annual price of Brent crude oil in 2021 was $71 a barrel – the highest in three years. This represented a dramatic recovery after the $40 average in 2020, when an historic collapse in demand during the coronavirus pandemic resulted in an existential threat to oil-producing countries.
Crude oil prices soared in 2021 as increasing Covid-19 vaccination rates, loosening pandemic-related restrictions and a growing economy resulted in global oil demand rising faster than supply. The spot price of Brent crude oil, a global benchmark, started the year at $50 per barrel and increased to a high of $86 per barrel in late October before declining in the final weeks of the year.
However unique recent circumstances have been, last year still marked the seventh year in a row when the average price of Brent crude has changed by big double-digit percentages. Indeed, in only four years in the past 20 have we seen a single-digit change to the average annual price – the only consistent reality in oil markets over the past two decades has been big-swing volatility.
The good news is that 2022 – all things being equal with no black swans – will most likely be one of those leap years when we witness only a single-digit change in prices. The bad news for oil producers is it is more likely to be down than up.
There are many reasons to expect that oil prices will hold onto their 2021 gains because, as every month that goes by, more fundamental supply and demand floorboards are nailed in under this very successful managed market recovery.
These include inventories that are down to below five-year averages and falling; global demand is returning towards the 2019 level of 100 million barrels a day; the 2020 collapse in new supply capital expenditure to about $350 billion; and US shale oil continuing to warm up on the sidelines as reluctant bankers study balance sheets. Yes, US Federal Reserve fiscal tightening is another reason, but we all know how hard it is to hold onto New Year’s resolutions.
Ultimately, there are two main pillars to build your $65 average worst-case scenario in 2022.
Firstly, Opec+ countries have expended a massive amount of political capital and economic muscle to lift the oil price back up into the zone of balanced budgets and they are going to keep both feet on the proverbial gas to ensure that their hard-fought gains stick around for a while to allow their economies and societies to stabilise.
Secondly, there are only five states of the 23-member group that have been awarded increased production quotas from May 2022. Indeed, by the time we get to the middle of the year, the number of countries that can actually pump more oil at short notice will be reduced to probably just two or three Gulf states.
Every month that the oil-producing group increases its official production ceiling by 400,000 barrels per day, is another month closer to the world running short on available idle capacity.
Bon Voyage 2022!
Sean Evers is managing partner at Gulf Intelligence
