The crude oil markets have suffered another turbulent year in 2021 as the pandemic continues to threaten supply and demand across the world.
However, while uncertainty over the Omicron variant remains the main driver of volatility in oil, the latest data from the US Energy Information Administration was bullish across the board – showing that consumption has surged to record highs as inventories drop lower than analysts’ forecasts.
So, what is the outlook for oil in 2022? Will the global oil benchmarks hold onto their year-to-date gains, or will recovery run out of fuel?
On 26 November, when the Omicron strain was officially announced, oil prices declined by more than 13%. This was the largest drop in years and clearly highlights the market’s anxiety regarding another round of lockdowns, travel restrictions and production declines.
However, despite the prevailing gloomy outlook, oil benchmarks have been riding an uptrend for the majority of 2021. USOIL and UKOIL are now changing hands near $71 and $74 respectively – up 51% and 46% since the beginning of the year.
The Omicron variant did spark renewed fears over the global economic recovery but reports thus far have found that it may be less worrisome than initially thought and its effect on the financial markets will likely be subdued.
The Organization of Petroleum Exporting Countries (OPEC) has made an upward revision of its forecasts for global oil demand in Q1, 2022 – estimating that consumption will rise to pre-pandemic levels – upwards of one million barrels per day.
Increased supply puts pressure on oil prices and if the global economy fails to meet market expectations in the first quarter of Q1, it’s more than likely that bears will take advantage of the downward momentum.
As such, OPEC and its allies remain steadfast in their plans regarding oil production – output is set to reach 400,000 barrels per day by January 2022.
Of course, that doesn’t mean that the market is out of the woods yet as there are several risks and obstacles ahead. Aside from coronavirus-driven disruptions, the dollar’s strength is another factor that can heavily impact oil prices.
Inflation has been running unchecked, especially in the US, and as a result of the repeated calls to action, the Federal Reserve has officially announced that it will start tapering its stimulus program even faster than expected.
This reveals that the Fed is also worried about inflation rates going into the next year and officials are now planning for at least three interest rate hikes to be implemented in 2022.
Higher interest rates translate to higher yields, which means the currency is now more attractive to foreign investors, and the subsequent demand will support a higher exchange rate in favor of the dollar.
The price of commodities such as gold and oil, however, are inversely correlated with the US dollar, for the most part. Since crude oil is priced in US dollars, a weak dollar typically means that importers need to spend more dollars to buy their oil barrels. However, a stronger dollar will translate to more barrels for fewer dollars.
In short, when the US dollar goes up, oil prices go down and vice-versa. And the impending interest rate hikes might pressure oil recovery throughout 2022.
If the last two years are any indication, market participants should prepare for further volatility in 2022. In fact, the new year may prove even more unpredictable, and the markets tend to act irrationally during times of uncertainty.
While global oil benchmarks are still holding near pre-pandemic levels, there are many external forces at play that could push the market in either direction.
If the global economic growth remains on track, the recovery will serve to support oil prices, but any long-term forecasts at this time can prove to be unreliable.