Agri Business

Supplies likely to ease crude oil price by early 2022

G Chandrashekhar | Updated on October 05, 2021

Surplus market seen to bring relief to import-dependent countries like India

For economies crushed by energy prices that have touched multi-year highs, there’s some good news on the crude oil front. After a year of tight supplies, improving demand and elevated prices, the crude oil market is likely to see a correction early next year. If anything, the signals will become apparent towards the latter half of this quarter itself.

The prevailing situation of demand growth outpacing supplies is expected to give way to normalisation of demand growth and easing of supply. The OPEC+ is expected to ramp up production. African producers, including Angola and Nigeria, have lagged in meeting their production targets.

Brent crude recently touched $80 a barrel — a three-year high following a simultaneous global stock drawdown. In particular, China had five consecutive months of stock declines. At the same time, the oil cartel has not been able to ramp up production as expected, while the US shale output is still struggling to recover despite attractive market rates.

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On the other hand, large-scale vaccinations and rapid return to economic activity, including travel, have pushed demand higher in many markets including the US, Europe, China, Japan and India.

However, global demand growth is beginning to show signs of slowing, particularly because of weakening Chinese demand in a trend that is expected to continue into 2022.

At the same time, production in 2022 is expected to expand about 5 per cent to breach the 100-million-barrels-a-day (mbd) mark due to an anticipated strong rise in OPEC+ output. In July, OPEC+ had agreed to collectively raise production by 400,000 bpd each month between August and December 2021. All remaining production caps are set to end by the close of next year.

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With escalating prices, OPEC has been under pressure from the international community to ensure adequate supplies; but disruptions in Angola and Nigeria put paid to hopes. The US production that suffered due to hurricane may also come online, adding to supply pressure. More rigs will become operational.

Importantly, with oil prices rising by close to 50 per cent this year, there is great incentive for producers to ramp up output. For producers there’s no incentive greater than price incentive.

So, in 2022, the oil market is expected to slip back into surplus with enhanced production and muted demand growth. Price correction will accelerate with the less-committed financial investors exiting the market. Another price impacting factor will be the US Fed signalling the start of the tapering process (expected in December) in tandem with a firming US dollar.

Lower crude prices are sure to bring marked relief to countries such as India that are substantially dependent on import to meet domestic needs. To some extent, it will help moderate inflation expectation.

(The writer is a policy commentator and commodities market specialist. Views are personal)

Published on October 05, 2021

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