December 2021 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil dropped by $7.44 (-9.4%), to $71.71 per barrel in December. That decrease occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of October’s decrease of 332,000 barrels-per-day (BPD) in the amount of petroleum products demanded/supplied (to 19.9 million BPD, and a falloff in accumulated oil stocks (December average: 425 million barrels).

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From the 4 January 2022 issue of The Energy Bulletin:

Oil: According to Gasbuddy, gasoline prices could rise to almost $3.80 per gallon before peaking this coming May. That’s considerably higher than what the federal government projects for prices at the pump. Earlier in December, the EIA forecast in its Short-Term Energy Outlook that the average retail price for gasoline would fall to $2.88.

OPEC:  The 23-nation alliance led by Saudi Arabia and Russia is likely to proceed with another modest monthly hike of 400,000 b/d as it restores production halted during the pandemic. Several national delegates also said they expect the boost -- due to take effect in February -- will go ahead. OPEC and its partners see global demand continuing to recover this year, taking only a mild hit from the omicron variant. Their confidence is being validated as heavy traffic across key Asian consuming countries and dwindling crude inventories in the US buoy international prices near $80 a barrel.

OPEC agreed to appoint Haitham al-Ghais, a former Kuwaiti governor to OPEC, as its new secretary-general, to succeed Nigeria’s Mohammad Barkindo. He will take over the role on Aug. 1st. The secretary general-elect said on Monday that global oil demand should return to its pre-pandemic levels by the end of 2022.

As the world races towards a greener tomorrow, OPEC+ officials have noted that the energy transition, if not managed well, could lead to underinvestment in oil and gas, which could mean even higher prices. OPEC+ did some surprising things in the past two years. First, it broke up at the start of the pandemic with its two leaders-Saudi Arabia and Russia-turning on each other because of differences of opinion on how the crisis needed to be handled. Then the two made up, and the group united around the deepest production cuts in the history of OPEC in response to the demand destruction caused by the pandemic, also unprecedented.

Shale Oil: Drillers in the biggest US fields are shouldering record costs at the same time that some banks are increasingly reluctant to loan money to the sector, according to the Federal Reserve Bank of Dallas. Equipment, leasing, and other input costs for oil explorers and the contractors they hire surged to an all-time high during the current quarter, the Dallas Fed said in a report released last week. Drillers also saw the universe of willing lenders shrink in the Eleventh Federal Reserve District. “The political pressure forcing available capital away from the energy industry is a problem for everyone,” an unidentified survey respondent said. “Banks view lending to the energy industry as having a ‘political risk.’ As a result, the capital availability has moved down-market, and it is drastically reducing the size and availability of commitments regardless of commodity prices.

Prognosis: The fast-spreading Omicron variant is clouding the outlook for oil markets after a rapid recovery in demand pushed prices to their highest levels in years. Oil marched higher for much of 2021. Orders increased as economies revved up, while producers in the Middle East and elsewhere kept millions of barrels of crude each day in the ground. As a result, the global benchmark, Brent crude prices, climbed over 50% to $77 a barrel.

Most US oil and gas firms expect to raise their capital expenditures during 2022. Yet, capital available to the industry is constantly shrinking as banks continue to shun the sector due to ESG pressures. Moreover, the Biden Administration, with its green agenda and anti-oil policies, is discouraging many in the shale patch from boosting capital budgets beyond the bare minimum.

Investment bank analysts seem to overwhelmingly expect higher prices because of strong demand and not-so-strong supply. This year will see even more robust oil demand than 2021, even with a temporary dip during the first quarter. Oil demand suffered a severe blow during 2020 when the coronavirus in China spread worldwide and started prompting lockdowns. Then the wave receded, and oil demand began to rebound, much faster than most expected. Despite the green transition, demand will continue to recover this year and those after it. Many forecasters, including BP, in 2020 argued that peak oil was already past us and what we had to look forward to was a more renewable energy mix. And then Covid-19 case numbers in critical markets began to decline, and oil demand rose.

According to analysts, more deep-water exploration and project sanctions in the US Gulf of Mexico could be in store for the E&P sector during 2022 assuming robust oil prices hold up. The roughly 12 deep-water US Gulf discoveries in 2021 could expand by a couple more this year, and several fields that have patiently waited out years of price volatility may finally be greenlighted, said a senior energy analyst for S&P Global Platts Analytics. “We could potentially see more finds and final investment decisions next year [2022].” US Gulf operators still have a healthy appetite for exploration, particularly as crude prices remain high.

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Selected highlights from the 4 January 2022 issue of OilPrice.com‘s Intelligence Report include:

There has been a noticeable shift in sentiment in the oil market, with an increasing number of forecasts stating that demand destruction coming from the Omicron variant would not be as bad as previous variants due to the absence of widespread lockdowns. Sure enough, cases have been climbing in key areas, but governments are reluctant to repeat 2020/2021 policies again. Oil demand remained solid in December, essentially trending on par with November levels, whilst global manufacturing activity strengthened globally amidst easing supply chain bottlenecks. Thus, the bullish case for more OPEC+ crude is by no means paradoxical, especially when one considers all the supply-side disruptions in Libya and elsewhere. As a result, ICE Brent traded moved above the $80 per barrel threshold this week, whilst US benchmark WTI was hovering around $77.5 per barrel.

OPEC+ Agrees to Another Output Increase in February. The group of oil producers comprising OPEC and non-member participants including Russia agreed to extend the 400,000 b/d monthly supply increments into February 2022, arguing that overblown Omicron fears will not have a significant impact on global demand going forward.

EU Accused of Trying to Bury New Year’s Taxonomy Draft. Environmental groups unleashed an avalanche of criticism on the ‘sustainable finance taxonomy’ of the European Commission stipulating that both gas and nuclear are compatible with green objectives, arguing Brussels tried to bury it by issuing it on New Year’s Eve.

 

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.