Early in 2021, we published an article discussing why oil and gas stocks were preparing to soar. And soar they did. The price of WTI Crude Oil rose from $48 at the start of the year to over $84 in October, slipping back to just under $70 in December. Brent Crude followed a similar trajectory.
In October, European natural gas prices soared to €160 per megawatt-hour, leading electricity prices to rocket. Meanwhile, coal prices also surged as countries were forced to use coal as gas became too expensive. This energy crisis sent the oil prices upwards.
Nothing is black and white when it comes to balancing energy supply and demand. Throw geopolitics, OPEC+, and economics in the mix, and we have a complex situation at work.
Some camps believe oil demand is stronger than ever, and as supplies diminish, we'll continue to see a rising oil price in the years to come. Others believe oil is dead, and its' time to move on to the bluer skies promised by renewables.
In the meantime, the arrival of Omicron has once again suppressed demand, but for how long is the million-dollar question.
Oil is on its way out
Governments' fighting climate change is a primary concern, and renewable alternatives present a greener path to meeting energy needs. This desire to clean up means stopping the use of dirty fossil fuels, which has led to a drastic drop in money being invested in exploring and drilling for oil and gas.
While, in principle, this is a noble endeavor, the reality is the world still needs oil. It also needs gas more than ever because natural gas is a vital component in the shift to electrification.
And all is not as it seems. Under the guise of COVID suppressing demand, is the harsh reality that demand for natural gas has never been higher.
Natural gas inventories have been plummeting, and in Europe, it's reaching crisis mode.
EUROPEAN ENERGY CRISIS: Day-ahead electricity prices across much of Europe set fresh and frightening record highs. Germany jumps to an incredible €431 per MWh. At current prices, energy-intensive industries will rather shut down and re-sell their power on the spot market pic.twitter.com/GZFaxLEJei— Javier Blas (@JavierBlas) December 20, 2021
Many are suspicious that Russia has been withholding gas supplies to the detriment of Europe. Meanwhile, a freezing winter, falling production levels, geopolitical tensions and surging demand all point to reasons we can believe a sustained oil price rise is likely in 2022.
The IMF estimates global oil demand growth will rise 4.9% in 2022. At the same time, the International Energy Agency (IEA) projects growth at 3.4 million barrels a day next year. Meantime, the S&P Global Platts Analytics 2022 Energy Outlook projects oil demand will increase by over 4 million barrels a day in 2022. It lowers this to 3 million in light of very bad COVID outcomes and raises to 6 million if we bounce back quickly.
OPEC to the rescue
The OPEC+ alliance can control oil pricing to a degree as it turns the taps on and off, but it cut output in recent years to meet the slowdown caused by COVID. While it can increase this at any point, it takes time for production to catch up with rising demand.
In November, OPEC+ rejected requests to increase production. Still, the US and some other countries opted to tap their emergency reserves to try to push back on rocketing prices and surging inflation. While they can ease the pain temporarily, their emergency reserves are limited, and this is considered a short-term solution.
Therefore, what happens in 2022 very much depends on world events and crucial decisions.
Continued COVID fear, vaccine-resistant strains and forced lockdowns will keep the oil price low as a lack of travel will ensure energy consumption slows. Alternatively, heightened tensions between the US and Russia could exacerbate an energy crisis and drive oil prices higher.
Then there's the theory that some camps believe OPEC+ reserves are much lower than they'd have us believe. Hence the reluctance to open the taps.
Is $100 oil possible?
100-dollar oil is absolutely possible. In both 2008 and 2011, oil prices exceeded $100 a barrel, and from 2011 it stayed there until 2014. The 2011 to 2014 oil price rise was caused by the Arab Spring conflicts spreading through North Africa. This affected oil-producing nations, including Libya, which is an OPEC+ member.
War, conflict and geopolitical tensions trigger oil price rises, and there's been no shortage of these in recent times.
Could the oil price go negative again?
Technically the oil price could go negative if a significant shock permeates the markets. It would have to be something like the COVID-19 pandemic, stopping globalization in its tracks and suppressing demand. Although it's not out of the question, the chances of a negative oil price shock, like we witnessed in April 2020, are slim.
Goldman Sachs sees $100 oil ahead
Goldman Sachs (NYSE: GS) is an oil perma-bull, so it's no surprise it projects $100 oil in the coming months. Some take this with a pinch of salt as back in 2008, Goldman predicted oil prices surging above $200 a barrel only for it to turn bearish. This became known as the Goldman Sachs Kiss of death.
Nevertheless, Goldman has been proved right on many occasions, and it's not the only bank predicting $100 oil in the year ahead. JP Morgan forecasts $125 per barrel.
Oil and gas outlook hinges on many factors
A cold winter in critical markets such as China, Japan, and Europe will weigh heavily on oil and gas inventories, causing prices to soar. Weather pundits warn La Niña conditions make cold weather likely. But it's been known for weather forecasts to be wrong, and a mild winter would ease oil and gas prices.
Can supply catch up with demand in 2022? If so, then $100 oil may be short-lived if reached at all.
However, supplies need to exceed growing demand and replenish depleted stores. This makes supply growth less likely. And this is exacerbated further by geopolitical risks.
The big geopolitical factors to keep on your radar are an Iran Nuclear Deal and Russia's Nord Stream 2 progress.
The return of Iranian oil
A US-Iran nuclear deal has been on the horizon ever since Biden took office, and a framework is expected to emerge in Q1 of 2022. If a nuclear deal is struck, then Iran should be allowed to produce oil again and thus flood the market.
The S&P Global Platts Analytics 2022 Energy Outlook states Iran could achieve full sanctions relief by April, allowing for an additional 1.4 million barrels of oil per day by the end of the year. However, there's also a high chance no deal will be struck. And if it is, these additional Iranian barrels will not be enough to ensure sufficient supply growth without further help from OPEC by summer.
Furthermore, OPEC will struggle to provide the necessary capacity without Iranian oil. And if Iran doesn't strike a deal, it's expected that tensions in the Middle East will heighten once again, leading to an oil price spike.
Nord Stream 2 pipeline
When it comes to domestic gas supplies, Russia is a key player. The country remains the primary source of global spare gas capacity. European gas supplies have been gradually falling over the past decade leading it to become more reliant on Russia.
The Nord Stream 2 pipeline will help Russia transfer gas into Europe as it moves away from transiting gas through Ukraine. However, with Russian troops lining the Ukrainian border, European regulators are hesitant to sign off on the Nord Stream 2 project. If this is delayed beyond the summer months, Europeans will be desperately seeking gas supplies once again. In turn, affecting domestic and global LNG prices.
COVID headwinds prevail
As the COVID-19 situation rumbles on, governments are torn between running the economy smoothly and preventing the virus from spreading. Thus, most believe that flights and transport will be less badly affected than in previous lockdowns even with restrictions in place. This should help support oil demand, as will vaccine rollouts and treatments.
If there are travel restrictions, worker shortages and further port jams, then the companies drilling for oil will also be adversely affected. If production slows while demand continues, the oil price is likely to rise again.
In addition to all the complex factors governing the oil price, the S&P Global Platts Analytics notes other interesting goings-on in the market that investors should keep an eye on.
US LNG projects
After years of suppressed gas prices, the recent price surges have led US LNG liquefaction projects to become more viable. This leads investors to expect between two and five new project launches.
Rising coal use
While China's thermal coal use soared in 2021, India is close to overtaking it as the world's largest importer. Global coal demand climbing when the political stage is focused on advancing renewables is a sorry state of affairs. But unfortunately, this is where we are, and global coal demand is set to rise even further in 2022. Thus, CO2 emissions from energy combustion are projected to increase by 2.5% in 2022. Various political events could derail government pledges to ramp up environmental policies. This includes the US mid-term elections and Australian political contention.
All-in-all, $100 oil is feasible, but there are many factors at work and how it plays out remains to be seen.