BAKU, Azerbaijan, Jan.6
By Leman Zeynalova – Trend:
We anticipate fundamentals will revert from undersupply to oversupply in 2022, setting the stage for prices to decline across the year to an annual average price below the current spot price level, Trend reports with reference to Fitch Solutions.
The company said that this bearish view is supported by our expectation for demand growth in 2022 and 2023 to slow, at the same time as supply builds from both OPEC+ and non-OPEC sources.
“Our current estimates are for supply to outpace demand by nearly 2mnb/d in 2022, before the gap closes across the next several years. US relations with China and Iran will be key areas of risk to this forecast, as a failure to agree new nuclear terms with Iran will see less supply in late 2022, while poor relations with China could hamper the economic activity between the two largest economies,” Fitch Solutions said in its latest report.
Futures pricing indicates that fears for oversupply are building.
“The coordinated release of strategic petroleum reserves from the US, China, India, Japan, Korea and the United Kingdom will see new supply impact markets in the early part of 2022. The volume of oil released into local markets is roughly equivalent to the volume of three consecutive months of OPEC+ production increases of 400,000b/d. The timing of the new supply has weighed on near-term prices, coinciding with a seasonal softening in crude demand over Q1, as the refining sector enters the shoulder season and increased capacity is brought offline for maintenance,” the report says.
Brent’s term structure temporarily shifted to contango in early December, as uncertainty around the Omicron variant increased and the US announced the coordinated release from the strategic petroleum reserves of six countries.
“The volume of the petroleum release is being viewed by the markets as a temporary price driver, evidenced by the strong recovery in spreads to backwardation. However, the spread between front and second-month contracts remains weaker than prior to the events of early December, highlighting the market’s gradual shift to an oversupply outlook in the near term. The six-month spread is at USD2.5/bbl, which is well below peak levels but near the average for most of 2021,reflecting the market’s uneasy support for ongoing undersupply conditions as conviction wanes,” Fitch Solutions said.
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