Crude oil prices rally 56% in 2021; Omicron and demand worries to impact rates in 2022

The energy counter has made a strong comeback in 2021 sustaining a robust crude oil price rally in 2021. From the very beginning of the year, there has been an unrelenting up move with little pauses in between, where prices hit their highest levels since 2014.

Also, OPEC and allies continued with their record production cuts of 9.7 million barrels per day (mbpd) since mid-2020, to clear the supply glut which anchored the prices on an uphill journey. Saudi Arabia even added 1 mbpd of voluntary output cuts from February through March to prop up the prices.

In the later part of the year, the oil cartel however changed its stance and decided to gradually withdraw output cuts, against the backdrop of revival in demand. However, supply bottlenecks amid Hurricanes Ida and Nicholas, low inventories, and finally the energy crunch gripping parts of Europe and Asia, with soaring coal and natural gas prices led to a lot of substitute demand and a steep rise in oil prices.

Despite the pressure from some large consumers to pump more oil, OPEC+ stuck to their plans to raise supply gradually. This pushed prices on the upwards trajectory as supply was not able to match the rapidly rising demand, leading to tightening of the market. Besides, the U.S. production was not able to compensate for OPEC+ supply cutbacks and remained far from the 12.3 mbpd record set in 2019, owing to storm-related disruptions and under-investment in the sector.

As we step into 2022, it seems prices will soften initially as there is a lot of uncertainty stemming from the fast-spreading Omicron variant. While supply is anticipated to witness a rise from the major producers, demand worries would keep prices under check amidst the fragility emanating from the Covid threat.

OPEC+ alliance plans to stick to their existing policy of restoring monthly output by 400,000 bpd, though it remains to be seen how they react to the recent risks to demand from re-imposition of lockdown measures in certain countries. For the year ahead, demand for oil in OECD countries is expected to rise by 1.8 mbpd, while in the non-OECD region it is forecasted to surge by 2.3mbpd, aided by improved demand prospects, particularly in Asia.

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