Commodities 2022: the recovery in oil demand holds up despite the omicron threat

Strong points

Global oil demand exceeds pre-pandemic levels

With pent-up demand, surge jabs fuel global resilience

The risk of inflation weighs on the pace of the recovery

Even as cases of the omicron variant of COVID continue to multiply around the world, most market watchers remain optimistic that 2022 will be the year when global oil demand finally catches up and exceeds pre-COIVD levels. .

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Triggering the highly transmissible mutation may slow the pace of the recovery in oil demand but will not derail its course, the consensus seems to be.

The underlying fundamentals of oil demand remain strong through 2022. pent-up demand is already stretching supply lines to the limit as booster injections and previous infections reduce the risk of serious damage from the virus.

Despite headwinds, the International Energy Agency and OPEC expect oil demand to exceed 100 million barrels per day in summer 2022, returning to pre-level levels the crisis induced by COVID in the first half of 2020.

Although the recovery has hit a slowdown with the increase in winter cases in many parts of the northern hemisphere, new blockages have remained limited and high-frequency mobility data shows limited impact.

Indeed, most high-frequency data has shown that global mobility is now rebounding after an initial pullback on omicron restrictions.

While mobility particularly faltered in Europe in early December, adjusted data from Google shows global activity improved to just 3.8% below pre-COVID levels in the week to December 19 , the highest since the oil consumption pandemic in 2020.

The data, which represents countries consuming about half of the world’s oil, suggests that the recovery in demand was little disrupted by the variant, despite regional disparities.

Global capacity of scheduled airlines also increased by 1% in the week of December 20, even with European air traffic improving despite restrictions on British travelers to France and Germany.

Diminishing returns

Damien Courvalin, head of energy research at Goldman Sachs, sees the omicron as a short-term price risk, with 2022/23 remaining a “structural bull market” supported by the fact that the global economy has become more resilient to crisis.

“We already had a record demand before this new variant and you add a higher demand for jets and the global economy continues to grow,” Courvalin said on Dec. 17. “You see how we’re going to hit a new record of average demand. In 2022, and again, in 2023.”

Still bullish, Goldman Sachs predicts Brent will remain around $ 85 / bbl in 2022 and 2023, but is considering a return to $ 100 / bbl as a possibility.

S&P Global Platts Analytics expects global oil demand to grow 4.6-4.8 million bpd in 2022 or just under 5% to an average of 103 million bpd. At this level, total demand will exceed pre-pandemic levels by around 0.6 to 0.8 million barrels per day in 2022.

“In 2022, we expect new COVID variants like delta and omicron to continue to emerge, along with localized coronavirus outbreaks, but not on the scale seen in January 2021, May 2021 or even peaks in August 2021. Total demand is expected to extend its recovery, although the pace of improvement will slow, ”Platts Analytics said in a note.

Optimistic OPEC

Early concerns over omicron which caused oil prices to drop nearly 20% in a matter of days in early December are “exaggerated given the progress of vaccination in major consuming countries,” Commerzbank said in a note.

OPEC + has also signaled that it will temper its planned production expansion by 400,000 bpd per month if demand weakens significantly.

Even the IEA, which on December 14 lowered its outlook for both the level of demand in the first quarter of 2022 and year-on-year growth, is hedging its bets.

“The new containment measures put in place to stop the spread of the virus will likely have a more moderate impact on the economy compared to previous waves of COVID … We expect the demand for road transport fuels and materials. Petrochemicals continues to show healthy growth. It said.

OPEC is even more optimistic about the resilience of demand and expects a slightly surplus oil market in the second half of 2022.

Global oil stocks have also rebounded sharply. According to the IEA, OECD commercial oil stocks in October were 243 million barrels below the five-year average. By comparison, at the height of the pandemic, OECD oil stocks in mid-June 2020 were nearly 300 million barrels above the 5-year average.

In the United States, the world’s largest consumer of oil, gasoline demand has already reached 2019 levels.

Threat of inflation

Nonetheless, fears persist that omicron’s vaccine dodge potential could force a new wave of mobility restrictions, a move that would affect the most affected air travel and kerosene.

As it stands, Platts Analytics predicts jet fuel will show the largest percentage and volume gains of any petroleum product in 2022 at 31% or 1.7 million bpd. But global demand for jets is still not expected to return to pre-COVID levels until 2024 at the earliest.

Gasoline and diesel are both expected to gain around 4%, or around 1 million barrels per day each, to reach 2019 levels in the second half of the year. Among the other products, only ethane will outperform the average per barrel and gain 8%, or nearly 0.4 million bpd.

Soaring inflation could moderate demand as well.

As the global economy emerges from the pandemic, markets expect the U.S. Federal Reserve and other central banks to start raising interest rates in early 2022 in an attempt to slow economic growth. A resulting stronger dollar would also increase the cost of oil for importing countries.

While additional demand for oil will result from the switch from gas to oil, with power companies and refiners avoiding record gas prices, the effect has been smaller than expected, according to the IEA, with few signs of materialization in India, and Standardization of Chinese electricity production.

But if current trends continue and economies continue to reopen cautiously despite the omicron threat, the IEA forecast could remain the only pessimistic voice on the near-term recovery in oil demand at the start of the news. year.

Explore this topic: Commodities 2022

Steve R. Hansen