Will 2022 Be Kinder to Buyers of Diesel Fuel?

There is a drumbeat of predictions that oil prices will continue their upward march in 2022, even though some of the most basic supply-and-demand forecasts raise a question as to why. 

The final scorecard for 2021 was not kind to buyers of fuel for the transportation sector. Retail diesel prices measured by the benchmark weekly Department of Energy/Energy Information Administration price — used for most fuel surcharges — rose more than 17% over the course of the year, jumping to $3.613/gallon on Monday from $3.079/gallon on Jan. 3, 2021. For the year, it peaked at $3.734/g in November, the highest price since October 2014.

The benchmark Brent crude price peaked in October, with a few daily prices above $85 per barrel. West Texas Intermediate, with a price that is particularly important to trucks serving the oil patch, opened 2021 with a settlement of $47.62/b on the first trading day of the year. By late October, its price on the CME commodity exchange had passed $84/b before settling on the last trading day of the year at $75.21/b.

Surging world demand as the pandemic receded was cited as the primary cause of the rising price. The International Energy Agency, a group funded by consuming nations with data that is widely watched, said global oil demand in the early days of the pandemic plummeted all the way to 83.1 million barrels per day in the second quarter of last year from just under 100 million b/d for all of 2019. By the fourth quarter of 2021, it was back up to 98.6 million b/d. 

Increases in supply gains came off their pandemic lows but ran consistently below demand for all of 2021. The end result: a yearlong draw in inventories and surging prices.

There are forecasts that see this price rise continuing, bringing oil prices back up to levels of the 2010's,  when the U.S. shale boom finally produced so much oil that it sent prices falling, starting in 2014. 

For example, JPMorgan said in early December that it thought crude oil prices, measured by Brent, could hit $125/b in 2022 and $150/b next year. It cited what it sees as capacity restraint issues in OPEC and the other oil-exporting nations that fall under the loose amalgamation known as OPEC+.

"As the group's real volume potential is discovered, this should drive a higher risk premium to oil prices," JPMorgan said, according to news reports.

A similarly bullish forecast came from Goldman Sachs in a mid-December briefing with reporters, though not quite on the same level as that from JPMorgan. According to reports from that briefing, Damien Courvalin, Godman's head of energy research, said he could foresee a $100/b price, propelled in part by an eventual rise in demand from more international travel when the omicron variant slows its spread. 

Global demand by November was either near or at a record high level, according to many forecasters. When the omicron variant hit, estimates were that the virus may have sliced 100,000 b/d of demand out of the market that was approaching 100 million b/d, a pittance compared to the enormous demand losses when the pandemic first hit.  

With demand at 100 million b/d, and then continuing to grow in a post-pandemic world, there is a concern in the global oil market that investment isn't keeping up with growing demand. That lack of investment is driven by numerous factors. Some financing institutions, under pressure from investors and activists to employ policies more aligned with the principles of ESG (environmental, social, and governance) have pulled back lending to the sector, though there is no consensus on the size of any pullback. Shale companies in the U.S., which generated net free cash flow for years even as they increased production, are determined to be free cash flow positive and in many cases restrained themselves from new drilling in 2021 even as the price rose, in order to keep healthy cash flow numbers. 

That can be seen in the recent forecast by the U.S. Energy Information Administration, which said U.S. crude output averaged 11.7 million b/d in November with a forecast that the average in 2022 would be just 11.8 million b/d. However, it would be 12.1 million b/d by the end of the year, which is still a relatively small contribution to supplying increases in world demand.

But the EIA also has a more cautious price forecast, as is generally the case. It sees Brent averaging $73 in the first quarter of 2022, falling all the way to $66 in December. 

The EIA and others who are less bullish about the market in 2022 will cite forecasts of the supply/demand balance figure for 2022, which appears relatively favorable from the perspective of a consumer. 

The EIA, for example, in its most recent short-term energy outlook, said oil stocks worldwide drew on average about 1.31 million b/d in 2021. This year, it sees an average build of about 470,000 b/d.

The monthly IEA forecast is the one that tends to be most closely watched. It takes demand and then subtracts non-OPEC supply and OPEC production of natural gas liquids such as propane. What remains is what is known as the OPEC "call," a figure that is the amount of oil OPEC will need to balance supply and demand without inventory draws or builds. 

In November, the last full month for which data is available, OPEC produced 27.85 million b/d, according to S&P Global Platts. That is solidly above the call for all of 2022, which for the year is estimated by IEA to be 27.5 million b/d, though it does spike up to 28.2 million b/d in the third quarter.

The demand number estimated by IEA does rise above 100 million b/d in the second and third quarters of the year, so it's not as if the agency is being shy about seeing how much oil the world is going to need in 2022. 

A big question remains of how long the OPEC+ group will continue to put an additional 400,000 b/d of oil on to the market each month, as it unwinds production cuts put in place during the first months of the pandemic. It has been doing so since April.

The Platts report from November had OPEC+ output at 41.171 million b/d. The group had planned on putting an additional 400,000 b/d on the market in both December and January. Assuming that occurred, it would put OPEC+ output through January at about 3.5 million b/d less than its all-time high output, reached just before the pandemic hit, according to Platts data.

But as Platts said in a report about the ability of OPEC+ to keep ramping up: "The coalition's spare capacity is coming under question, with many of its members suffering from operational issues and technical problems due to mature fields."

This is not the first time a sentence like that has been written. The ability of the world's oil industry to meet demand has been called into question since the days of John D. Rockefeller.

What is concerning this time are the fears that ESG goals and other pressure to move away from oil and on to other energy sources could mean that the normal rise in capital spending that is normally spurred by higher prices may not result in the usual increase in exploration. 

If there is truly a breakthrough in the so-called energy transition, will investments made over the next few years result in the discovery of hydrocarbon assets that find themselves stranded? That is a major concern of the institutions either holding the cash to be lent, or with the drilling plans that they might — or might not — put into action. 

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