While the defeat of the latest covid variant seems to be imminent, the oil and gas sector is regaining some confidence and vies for recovery in 2022. However, the sector still has several risks to watch for in the new year.
As the impact of the new Omicron variant is likely to be mild and short-lived, the Organization of Petroleum Exporting Countries (OPEC) increased its forecast for global oil demand in the first quarter of 2022 substantially. OPEC boosted consumption estimates for the period by 1.1 million barrels a day — equivalent to annual world consumption growth in a typical year before the pandemic.
The oil exporters’ group expects oil demand to average 99.13 million barrels per day (bpd) in the first quarter of 2022, while demand growth remained unchanged at 4.2 million bpd and a total global consumption of 100.6 million bpd.
However, even though the world becomes better equipped to manage Covid-19 and its related challenges, the dynamics of oil and gas in 2022 may still be vulnerable to several geopolitical risks that are expected to further escalate in the coming period.
As usual, OPEC politics are still on top of the risks that can change the course of the oil and gas market. In 2022, oil and gas markets also have to watch out for risks such as the potential lift of Iran sanctions, which could bring up to 1 million b/d of crude to market within months, and the geopolitics risks resulting from conflicts between Russia and Ukraine, China and Taiwan and power race between US, Russia and China.
The Return of OPEC Powers
The dynamics of the oil economy are known to be different and more complex than other commodities and the oil price determination process goes beyond the usual market rules of demand and supply, though at its most primal level the market is the final arbiter of the price of oil.
Hence, OPEC+ members, who are the world’s top exporters, are still the key players in the process of oil price determination.
Crude oil prices rocketed in 2021, gaining more than 50 percent as demand recovered and oil-producing nations led by OPEC and allies boosted supplies modestly.
Even as the energy transition is gathering pace, the Organization of the Petroleum Exporting Countries and allies like Russia are finding greater chances to flex their muscles.
Under the latest climate pledges, the world is still expected to need 75 million barrels of oil per day by 2050, according to the International Energy Agency.
Building on such realities OPEC+ group is still having influence over oil markets. There are experts who think that the organization is likely to use this influence to compensate their losses during the pandemic or to achieve economic or political gains.
The group’s refusal to accede to US President Joe Biden’s calls to boost output to help ease pressure on gasoline prices triggered the decision by the US and other major energy-consuming nations to tap strategic oil reserves.
The situation displayed the group’s market power. However, Omicron has put OPEC and Russia on the back foot again.
Nonetheless, the strength of the group is projected to increase, especially as the climate crisis is prompting other producers to trim output, either because of pressure from financial backers or in anticipation of a decline in demand.
Pressure on big oil and gas companies in Europe and the US to rethink their strategies in light of the climate crisis is having an impact. In a report published recently, the IEA found that major oil and gas companies are holding aggregate oil and gas spending flat in 2021. Their share of industry-wide spending on exploration and production is now at 25%, compared to nearly 40% in the mid-2010s.
Meanwhile Saudi Aramco, for example, is working to boost its production capacity. Data from the IEA shows that OPEC and Russia’s share of oil production could climb from 47% in 2020 to 49% in 2030 if countries meet all of their announced climate pledges in full. By 2050, OPEC and Russia are expected to make up 58% of output.
As always, though, the group’s power is dependent on politics and the ability of its members to play as one team. Breaks between Saudi Arabia and Russia in March 2020 caused prices to collapse.
Geopolitical Risks to Watch in 2022
As the year 2021 concluded, the world was watching the news closely for dangerous escalations between the US and Russia, who has been moving troops toward the border with Ukraine while demanding Washington guarantee that Ukraine will not join The North Atlantic Treaty Organization (NATO) and that the alliance will refrain from military activities in and around Ukrainian territory.
The crisis has provoked fears of a renewed war on European soil.
In a telephone call with Russian President Vladimir Putin amid mounting tensions at the border, US President Joe Biden insisted that the US and its allies are prepared to respond “decisively” should Russia invade Ukraine.
The Ukraine crisis comes amid controversy around Russia’s role in Europe’s soaring gas prices. Some European officials have accused Russia of withholding additional volumes as it aims to launch the controversial Nord Stream 2 pipeline to Europe, whose approval by German regulators is on hold.
The pipeline is built and being filled with natural gas. However, Russia’s Nord Stream 2 faces a rocky road before any gas flows to Germany, with its new leaders adopting a more skeptical tone toward the project.
The pipeline opposed by Ukraine, Poland and the U.S. awaits approval from Germany and the European Union to bypass other countries and start bringing natural gas directly to Europe.
Pipeline critics say it increases Russia’s leverage over Europe, pits member states against each other and deprives Ukraine of key financial support.
The new year may also witness a new episode of escalation between the US and China, who claims the island of Taiwan as its own territory and has vowed to seize it one day by force if necessary.
Biden said the US would defend Taiwan if China attacked. The US has a law that requires it to help Taiwan defend itself.
China, meanwhile, insisted that the US will “face an unbearable price” over its actions towards the self-ruled island of Taiwan.
Of course, any military confrontation in Ukraine or Taiwan would be a shock to the global economy that could have devastating repercussions on energy markets.
The market is also watching out for the results of the new round of the Iran nuclear talks. Although risks of no-deal are still high, a deal is still possible given Biden’s desire for a diplomatic solution. Such a solution can add 1.4 million b/d of Iranian supply in 2022.
Iran has already demanded that world powers allow it to sell oil on international markets to replenish its dwindling foreign currency reserves, as talks resumed in Vienna aimed at reviving the 2015 deal to curb Tehran’s nuclear program.
The oil and gas industry has rebounded strongly throughout 2021, with oil prices reaching their highest levels in six years. However, given the accelerating geopolitical risks, uncertainty remains high over market dynamics in the coming year.