Crude market could reach surplus in Q2 on muted Omicron impact – IEA

Jonathan Lopez

19-Jan-2022

MADRID (ICIS)–The crude oil market could post a surplus in Q2 as producers increase output to take advantage of prices at multi-year highs, the International Energy Agency (IEA) said on Wednesday.

Although global coronavirus cases are at record highs, the impact on healthcare services due to the Omicron variant has not been as severe as in previous waves.

Measures by governments to contain the pandemic are not as strict as before, helping economic activity.

“This time around, the surge [in cases] is having a more muted impact on oil use. Indeed, mobility indicators remain robust and oil demand has been stronger than expected in recent months,” said the IEA.

Crude oil prices hit a seven-year high in afternoon trading in Europe on Wednesday after crude producing cartel OPEC said earlier in the week that the impact of Omicron is proving less severe than expected.

POTENTIAL SURPLUS BY Q2
Low-cost producers within OPEC+, led by Saudi Arabia and Russia, have been capping their output for years to rebalance the global crude market, agreements which were renewed at the beginning of the pandemic after demand collapsed in Q2 2020.

However, producers outside that group who respond to normal market dynamics of supply and demand have been absent because their higher cost output was not profitable in the depressed market.

That may not be the case any longer. In 2022, US output is expected to hit a record high of more than 17m bbl, the IEA said, as producers put more rigs to work.

“World oil supply is forecast to grow sharply this year, with the US, Canada, and Brazil set to pump at their highest ever annual levels… Additionally, Ecuador, Libya, and Nigeria are already ramping back up,” said the Paris-based agency.

“Finally, Saudi Arabia and Russia could set records if remaining OPEC+ [output] cuts are fully unwound. In this case, global supply would soar by 6.2m bbl/day on average in 2022, compared with a 1.5m bbl/day rise in 2021.”

Although the market could reach a surplus by Q2, the IEA also noted that global stocks are well below pre-pandemic levels and pointed to “a growing discrepancy between observed and calculated stock changes” which suggests that demand could be higher or supply lower than reported or assumed.

“Moreover, higher output would also result in lower OPEC+ spare capacity. By the second half of the year, effective spare capacity (excluding Iranian crude shut in by sanctions) could shrink from around 5m bbl/day currently to below 3m bbl/day – most of it held by Saudi Arabia and the UAE,” it said.

“If demand continues to grow strongly or supply disappoints, the low level of stocks and shrinking spare capacity mean that oil markets could be in for another volatile year in 2022.”

As for demand (see bottom table), the IEA said current data suggests it will exceed pre-pandemic levels in 2022.

PETROCHEMICALS: NAPHTHA VERSUS LPG
Healthy industrial activity around the world is keeping petrochemical demand for crude oil high.

In Europe, for the majority of 2021, olefin production – a key building block for petrochemicals – took advantage of “very competitive naphtha costs” and used it as a main feedstock instead of liquefied petroleum gas (LPG).

This situation could change in 2022, said the agency.

“Many European steam cracker operators have flexibility to replace some of their naphtha intake with LPG. Recent tightness lifted prices, making global LPG less attractive and boosting naphtha consumption,” said the IEA.

“However, with prices rebalancing, this margin advantage began to fade late in the year, suggesting that naphtha demand will begin to soften in 2022.”


Front page picture: Oil rig in the US, where output is expected to reach a record high in 2022
Source: Tony Gutierrez/AP/Shutterstock

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