Outlook 2022: Global oil markets
Outlook 2022: Global oil markets
- The outlook for oil prices is positive as we go into 2022, with limited new supply but growing demand.
- Price of oil may increase to above $100/bbl during 2022.
- Biggest risk is the return of Iranian barrels which would see the oil market switch to a surplus and could prompt a fall in prices towards $60/bbl.
After a surge in oil prices during 2021, market attention is now turning to 2022. Inventories will likely start the year below the five-year average, and natural gas prices in Europe and Asia significantly above long-term norms.
Unless Iranian oil production picks up meaningfully or Covid-related travel restrictions disrupt demand, oil inventories will remain low, and prices could breach US$100/bbl in 2022. Indeed, if OPEC members continue to struggle to meet production targets, much more bullish scenarios are plausible for crude markets.
Demand set to grow in 2022
We expect oil demand to grow to 100.23 million barrels per day (mb/d) in 2022, up 3.5mb/d from 2021 and comfortably above the 2019 levels of 98.27mb/d. This is based on forecasts for global GDP growth.
Additional demand for oil will come as a result of switching from gas to oil. The estimates for this range from 0.2mb/d to 1mb/d from Europe and Asia where the price of gas is high enough to provide an incentive for switching.
Gas prices would need to double in the US for switching to be worthwhile, so we don’t anticipate any additional oil demand in the US from switching.
An additional source of demand could come from a rise in airborne freight, given the current problems with global supply chains. However, this is difficult to forecast and therefore is not included in our demand assumptions.
Supply will remain limited
If our demand assumptions prove correct, an additional 3.5mb/d of supply will be needed in 2022 at the very least. This supply is likely to come from OPEC, Russia and the US, with OPEC having the largest potential.
After cutting production by around 10mb/d in 2020 following a collapse in demand due to the Covid-19 crisis, OPEC+ (which includes 10 additional countries, including Russia, Oman and Mexico) is now increasing output by 0.40mb/d per month until September 2022 when each country hits their baseline.
If OPEC production doesn’t return to the baseline numbers, but instead can only return to the average production levels before Covid-19, then output will only increase by 1.2mb/d. This would be some 2.3mb/d short of the required new supply and could lead to higher prices for crude oil.
In the US, pre-Covid-19 production peaked at 13mb/d and is now at 11.3mb/d. The lack of investment over the past few years, due to significant capital restraint (as investors demand improved returns to shareholders and climate change considerations come to the fore) means that production is likely to increase by around 1mb/d to 12.3mb/d.
What are the main risks facing the oil industry in 2022?
There are three main risks to oil demand in 2022. These are: 1) if there is a return to widespread mobility restrictions if Covid-19 disrupts travel again; 2) a fall in demand from a short-term price spike; and 3) a weakening of growth due to supply chain disruption.
The biggest risk in terms of supply comes from Iran, which could increase production by around 2mb/d if relations with the West improve markedly. The exact pace and quantity of this is unknown. However, given the magnitude of the potential increase and the current market assumption that limited Iranian supply is likely in 2022, the impact on price could be significant. The increased Iranian supply would swing the balances for 2022 into a meaningful surplus.
The US has limited options on supply, but the most effective would be a change in its energy policy to encourage more oil production in the US. However, following the recent COP26 event this would seem unlikely.
- CIO Lens Q1 2022 - your new go-to guide to markets
- The inflation debate: the deflationary forces being overlooked
- Hunting for “10 baggers” – how the UK beat the US
- Infographic: How the energy transition is starting to accelerate
- CIO Lens Q1 2022: now’s not the time for big bets
- Q&A: why tackle harmful deforestation – and how?
The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.
Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).
Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799. For your security, communications may be taped or monitored
The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.