Oil markets to shift from undersupply to oversupply in 1H 2022

Oil&Gas Materials 13 December 2021 13:11 (UTC +04:00)

BAKU, Azerbaijan, Dec.13

By Leman Zeynalova – Trend:

The oil markets are expected will shift from undersupply to oversupply in the first half of 2022, Trend reports with reference to Fitch Solutions.

“The change should lead to lower oil prices and a potential divergence in production between OPEC+ and non-OPEC members. Despite the emergence of the Omicron variant in late 2021, OPEC+ have confirmed they will continue with a monthly production increase of 400,000b/d. This, combined with the coordinated release of strategic petroleum reserves orchestrated by
the US over the early months of 2022, will see increased supply come onto the market despite concerns that demand growth is slowing and with the impact of Omicron still unclear,” reads the report released by Fitch Solutions.

The company notes that however, questions surround OPEC+ and their ability to meet the higher production targets going forward.

“Notably, both Nigeria and Angola have consistently failed to produce their quotas in full, averaging 264,000b/d and 227,000b/d below their respective targets, for the three months to October 2021. Should OPEC+, shift from their current plans to bring all cuts to zero by the close of 2022, we could see new output diminish, opening the door for non-OPEC producers to take advantage of the higher prices supported by OPEC market management,” the company analysts say.

Fitch Solutions note that efforts from OPEC+ to return idled production to the market looked poised to push markets into oversupply and has already turned sentiment and prices lower to end 2021.

“The futures market is also starting to price in the expectation for looser supply in 2022 with backwardation conditions weakening substantially, even before the announcement of the Omicron variant in late November. The six- and 12-month spread from Brent front month futures has steadily declined as crude buyers begin to price in expectations for oversupply. If the spreads turn negative, a condition known as contango when crude buyers are incentivised to hold crude in expectation of higher prices in the future, it would be a firm signal that the market dynamic has shifted to oversupply. Given the high uncertainty of the impact of the Omicron variant and the ability of OPEC+ to change tack in response to changing market conditions, there is a high risk to this view. Nonetheless, we expect high price volatility to be a reoccurring hallmark for 2022, similar to 2021 and 2020,” the report says.


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