Oil demand faces downside risks; unanticipated supply shortage in 2022 with much to watch

Wood Mackenzie, a Verisk Company (Nasdaq: VRSK), releases its report Oil Markets: 5 Things to Look for in 2022 which addresses the uncertainties and issues affecting global oil demand, supply and refining markets this year .

Oil demand is likely to decline

The shape and scale of viral outbreaks and government responses pose a downside risk to economic recovery and oil demand growth in 2022. Moreover, with the accelerating pace of inflation in fourth quarter of last year, consumption could be further hampered, posing a downside risk to economic growth and personal mobility.

Vehicle electrification policy and the pace of its adoption in 2022 will impact global transport fuel demand in this decade and beyond. China’s subsidy for electric vehicles will be phased out by the end of 2022, after a two-year extension in response to the pandemic. Wood Mackenzie expects electric vehicle sales in China to continue to grow strongly, growing from 6% in 2020 to 15% in 2021 and 19% in 2022.

Europe’s proposed “Fit for 55” changes to the Energy Taxation Directive remove tax exemptions on aviation and marine bunker fuels sold and intended for use in the EEA from of 2023. This requires the unanimous approval of member states, so it will be one to watch in 2022.

Oil supply expects strong growth in 2022

Global supply in 2022 is expected to increase by 4.8 million barrels per day (bpd), slightly outpacing demand growth. A supply shortage is not expected for this year.

Non-OPEC countries are expected to contribute nearly half of global oil supply growth, with North America the largest contributor, with gains from Canada and the United States, including Gulf of Mexico. Unlike 2021, U.S. Lower 48 crude production is expected to show year-over-year growth. However, operators are still focused on paying off debt and returning funds to investors. Inflationary pressures could also weigh on activity levels.

Elsewhere, the main sources of non-OPEC growth are Russia, Brazil, which should deliver after a disappointing 2021, and the North Sea, where strong production gains are expected.

OPEC+ policy will continue as planned

The OPEC+ agreement to increase production across the group by 400,000 bpd each month, until September 2022, is expected to continue. But OPEC+ producers intend to meet monthly to review fundamentals and adjust as needed if demand is different from expectations.

Wood Mackenzie Vice President Ann-Louise Hittle said: “Total OPEC crude oil production is expected to increase by 2 million b/d to 28.3 million b/d in 2022 from last year, and gains in Russian oil production are also expected.

“Cautious management at monthly OPEC+ meetings will prevail with overall growth expected even if a few of OPEC’s smaller producers are unable to post increases or even see production declines . A failure in market management is always possible because the group tends to use lagging indicators such as the inventory filling rate to make its decisions.

Global demand increases refining use, but margins remain below pre-pandemic levels

2021 was characterized by strong light ends, weak middle distillates and slower than expected commissioning of several major refining projects, particularly those in the Middle East.

Vice President Alan Gelder said: “We are closely monitoring activities in Jazan in Saudi Arabia, Al-Zour in Kuwait as well as Jieyang and Shenghong in China and Vizag in India, as these will make a significant difference in the balances supply/demand east of Suez. .

“However, the largest and most significant capacity addition is the 650,000 bpd Dangote refinery in Nigeria, which is currently scheduled to come on stream in mid-2022. Despite these investments, the Global demand growth is expected to outpace these 1.6 million bpd capacity additions, increase utilization and improve refining margins.The new normal, however, is a margin range lower than that enjoyed before the pandemic, as global usage is expected to remain below 2019 levels.”

China’s policy developments regarding its net refining capacity (especially those added illegally), crude oil import and refined product export quotas, and the start-up of its propane dehydrogenation (PDH) units ), will be areas to watch.

The high rating of the downstream portfolio could slow down; more focus on green strategies

Despite the need for further portfolio rationalization by the oil majors, plans to divest refineries could run out of steam in 2022. The majors and major regional players could struggle to find enough interest from buyers and investors, because the disposals of the most attractive assets in their portfolio have already been agreed last year. Companies could delay refinery sales and focus on an ongoing commitment to cost reductions and performance improvements, while developing more detailed energy transition strategies. Alternatively, other announcements of conversions of refineries into terminals and biological sites should be watched.

Refiners will come under pressure from shareholders and governments to devise strategies to reduce their carbon footprint. The impact of carbon costs on refinery revenues is a very real threat, which could lead to more refinery closures in 2022, as these costs cannot be passed on to consumers without regulatory support.

Gelder said: “Finally, a key topic to watch is the price of feedstock for renewable diesel. The recent wave of green fuel projects has increased the demand for vegetable oils and waste products. Can this price crisis be considered short-lived? Is the supply of raw materials sufficient to support the ramp-up of biofuels that refiners aim to develop?

“Global market players will have the opportunity to optimize feedstock types and origin, while local players face more stringent conditions, slowing the pace of growth in biofuel supply and its contribution to achieving net zero portfolios for refiners”.
Source: Wood Mackenzie

Steve R. Hansen