As vaccinations increased the opening of economies, oil saw its largest annual increase since 2009. Crude production returned to a more moderate pace while oil prices rose.
West Texas Intermediate saw a 55% increase in year-to-date, the largest gain in more than ten years. Brent, the global benchmark rose 50%, marking the biggest gain since 2016. As the Covid-19 variant spreads rapidly, investors are trying to assess the outlook for energy demand in the next year. OPEC will also meet with allied producers next week to discuss production policy.
The longest consecutive quarter-to-quarterly increases in crude oil prices since 1983 was also achieved by the United States. The late November discovery of omicron briefly rattled markets and threatened to stop the rally, but crude recovered quickly as demand continued to rise.
The market structure reflects optimism for the recovery. Benchmark Brent’s prompt spread in bullish backwardation at 43 cents per barrel is in contrast to a bearish contango that occurred less than two weeks ago.
Giovanni Staunovo (commodity analyst at UBS Group AG) stated that crude oil enjoyed a great 2021. This was due to continuing decline in oil inventories, which is benefiting from demand recovery and slow demand growth. “The oil market is still dependent on oil from OPEC+ as we move into 2022.”
The Organization of Petroleum Exporting Countries (OPEC) and its allies, including Russia, will meet next week to determine production levels in February. This group has been slowly restoring shuttered capacities, often in monthly increments up to 400,000 barrels per day. OPEC will also choose a new secretary-general.
The energy crunch that triggered the fall of natural gas and coal shortages earlier this year also contributed to oil’s rally in 2021. Increasing gas prices prompted a rise in demand for power generation alternatives in Europe and Asia as we enter the Northern Hemisphere winter.
OPEC+ to Boost Supply
After predicting a tighter outlook on global markets, OPEC and its partners are set to revive more halted production at their Tuesday meeting.
Delegates said that the 23-nation alliance, which includes Russia and Saudi Arabia, is poised to ratify a modest production revival of 400,000 barrels per day. This will restore supplies lost during the pandemic. The group’s analysts reduced their estimates of the surplus for the first quarter and predicted weaker supply growth from its competitors at a preliminary meeting Monday.
The Organization of Petroleum Exporting Countries (OPEC) and its partners have resumed around two-thirds of their production that was halted in 2020. They are now trying to drip-feed the rest at a pace that will meet the recovery in fuel consumption and stop any inflationary price spike, without sending the market into another slump. They have succeeded so far, with international crude oil prices hovering around $79 per barrel.
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