The EIA expects output increases from OPEC+, U.S. shale firms and other oil producers will outpace slowing growth in consumption, helping to bring down prices (“Short-Term Energy Outlook”, EIA, Nov. 9).
Front-month Brent futures prices are forecast to decline to less than $70 per barrel by the end of 2022, broadly in line with the current strip of futures prices, putting them close to the long-term inflation-adjusted average.
The EIA predicts global liquids production will increase by almost 2.5 million barrels per day (bpd) between December 2021 and December 2022, while consumption will rise by only 0.9 million bpd.
As a result, the agency expects production and consumption to be balanced in the first quarter of 2022, moving into a surplus of 0.7 million bpd in the second, 0.5 million in the third, and 0.9 million in the fourth.
The production-consumption balance in the first and second quarters is forecast to remain slightly tighter than usual for the time of year, before becoming slightly looser than normal in the third and fourth.
But all the anticipated balances are well within historic seasonal ranges, easily absorbed by the market, and unlikely to disturb prices much (https://tmsnrt.rs/3HgmO8K).
Nonetheless, there are reasons to think the strong rally in oil prices over the last year may experience at least a pause over the next 3-6 months.
Hedge funds and other investment managers have already accumulated a higher-than-average position in crude oil and other petroleum futures and options contracts.
From a positioning perspective, the balance of risks has therefore shifted to the downside, with liquidation rather than further accumulation more likely.
Crucially, the oil market is moving towards the weaker part of the year.
Over the last three decades, Brent futures prices have tended to be strongest relative to other months in September and weakest in March.
The probability of a sharp rise in oil prices is roughly equal throughout the year, but the probability of a significant short-term decline is greatest between December and April.
The result is an upward bias in prices that reaches a maximum in September and a downward bias in prices that reaches a maximum in March.
The market is now moving into the six-month period where seasonal declines are more likely, which could take some of the heat out of prices.
If this pattern is repeated, which is by no means certain, political sensitivity about surging oil prices could ease for a few months before escalating again towards the middle of 2022.