Looking back
Looking back, 2020 and 2021 were consistent in providing volatile price movements in crude oil markets, causing UK fuel prices to fluctuate aggressively and generally climb higher.
A 3yr Brent chart captures the unusually high volatility caused by fluctuations in the global economic outlook.
Our 2022 Oil Market Outlook:
The outlook for the oil market is intrinsically linked to global demand. The greatest risk to demand remains Covid-19 however many analysts expect the economic impact of the Omicron variant to be short lived and for global growth to exceed 4% in 2022. The initial market sell-off towards the end of 2021 pointed to market jitters from the new variant but with Brent beginning the year on an upward trajectory, having made gains over the festive period, these jitters appear largely abated for now. With the growing belief now that Covid is endemic, the thinking is that developed economies are better equipped to fight the virus which suggests the economic impact of potential future variants could be limited.
Looking back, the second half of 2021 was dominated by inflation, fuelled by the spike in energy prices – most crucially, Natural Gas. As this trend is expected to continue into 2022, we expect additional demand to come from producers shifting their inputs from gas to oil.
OPEC+ has been consistent and cautious with its production policy since the start of the pandemic and it appears that this approach looks set to continue into 2022. At the beginning of the year, the group chose to maintain its policy by increasing supply by 400,000 barrels per day. This appears to reflect the view that the Omicron variant will not have a major impact on global oil demand.
Given the continued unwinding of OPEC+ supply cuts, along with strong non-OPEC supply growth, the global oil market could return to surplus and could serve to keep the market trading back towards the 2021 highs. There however remains a question of how much spare capacity OPEC+ has to meet its supply targets. Recent data points to several smaller producers whose output is below their agreed levels, suggesting they do not have the capacity to increase output further. If output capacity is overestimated, this could contribute to upside risk for the market.
Covid related restrictions have had a severe effect on air travel and consequently jet fuel – a huge component of oil demand. Analysts argue that if we continue to see a recovery in air travel, particularly as restrictions worldwide continue to ease, higher jet fuel demand will feed into oil prices.
Undoubtedly Covid still poses an unknown to the markets and general optimism for 2022 rests on the crucial assumption that Covid will be kept at bay through the existing policy and vaccination roll-outs.
However whatever the future holds you can be sure that at CPS Fuels our aim remains very simple; to deliver the very best price and service we can, to the local customers we serve.