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Short supply and rising demand to sustain oil at $100 a barrel

The market is feeling the consequences of an underinvestment in hydrocarbons projects

Hydrocarbons shortage and increase in global demand will drive oil prices in 2022

Crude oil prices are expected to remain around $100 a barrel in 2022 as global oil demand returns to pre-pandemic levels and oil stocks tighten due to hydrocarbons producers redirecting investment into the energy transition.

Oil prices peaked at nearly $140 a barrel in March after sanctions were imposed on Russia following its invasion of Ukraine. Since then, prices have softened, trading around $100 a barrel after the International Energy Agency said it would release 60 million barrels over the next six months with the US matching that amount as part of its 180 million barrel release. 

Despite the continuing geopolitical tensions with Russia, Middle East market participants expect oil prices to remain around the $100 mark in 2022.

A tightening market

According to energy consultancy Facts Global Energy (FGE), the underlying global oil market balance will tighten through to the third quarter, before softening slightly in the final quarter of the year. Dated Brent oil prices are seen rising to $105.2 a barrel and above in the third quarter.

“Throughout the second quarter the underlying stocks position will continue to tighten up, putting a floor for dated Brent at around $100 a barrel,” FGE managing director Iman Nasseri told me. “We expect prices will linger around $100-110 through the second quarter and third quarter, before stock builds later in the year bring prices down to $100 a barrel.”

Abu Dhabi National Oil Company (ADNOC) CEO Sultan Ahmed Al Jaber also expects oil prices to remain supported this year as global demand recovers following the pandemic and supply continues to tighten.

“We are all witnessing firsthand how sensitive energy markets are to geopolitical shocks. Yet the current volatility in oil prices is the result of a deeper underlying structural issue … Long-term underinvestment in oil and gas has left markets more exposed to risks of any kind and wherever they take place,” Al Jaber said in a company statement.

Lack of investment

He said that current investment in oil and gas projects, estimated by the IEA to be around $200 billion a year, is below where it needs to be.

“Near term, we are also seeing markets tighten, with demand up almost three million barrels over the last year and [it] is expected to reach pre-pandemic levels by the fourth quarter of this year,” Al Jaber said.

The UAE, like other Middle East oil producers, has increased investment in low-carbon and zero-carbon energy sources over the past few years. ADNOC is growing its renewable energy portfolio five-fold and raising its natural gas capacity by 30 percent, thereby enhancing its ability to supply more liquified natural gas.

Middle East oil traders agree that the hydrocarbons shortage and increase in global demand will be key forces driving oil prices in 2022.

“There has not been enough timely investment into the development of new capacity across the globe and now that we are out of the pandemic and demand has returned, it is difficult for the supply to keep up,” confided one Saudi oil trader. 

“The geopolitical issues don’t help, but rising demand and limited supply will keep prices supported.”

Tahani Karrar is an energy analyst and founder of Manar Media

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