Crude oil prices surged further by about 10% in February 2022 with ICE Brent averaging above $94 / bbl.
EXECUTIVE SUMMARY
Crude oil prices surged further by about 10% in February 2022 with ICE Brent averaging above $94 / bbl.Continuing bullish oil market fundamentals and escalating geopolitical tensions in Eastern Europe, which raised worries about potential large oil supply disruptions, have greatly supported the oil market over the month. Oil futures climbed further in late February and in the first week of March as investors weighed the potential implications of sanctions against Russia that included cutting off some Russian banks from the SWIFT international payment system, which raised more worries about a severe disruption in crude and oil product exports. Worries about supply disruptions came amid strong global oil supply and demand fundamentals, lower OECD commercial oil stocks to the latest five-year average level and optimistic oil demand outlooks amid dissipating concerns about the COVID-19 situation. The global trend of COVID-19 infections showed a rapid decline. According to last month's IEA data, OECD commercial oil stocks declined by 60 mln bbl in December 2021. Signs of strong demand in the physical crude market amid signs of strong market fundamentals also buoyed oil prices. The ICE Brent front-month contract increased by $8.53, or +10.0%, in February 2022 to average $94.10 / bbl, and NYMEX WTI increased by $8.65, or +10.4%, to average $91.63 / bbl.On a year-to-date basis, ICE Brent was $30.93, or +52.6%, higher at $89.73 / bbl on average, while NYMEX WTI was higher by $31.61, or +56.9%, at $87.19 / bbl on average, compared with the same period a year earlier.
However, the situation on the oil markets became even much tougher in late February 2022 after Russia’s invasion of Ukraine intensified and oil buyers avoided barrels from Russia.Oil surged during the first week of March 2022, ending the period at multi-year high`s. Crude oil prices posted their largest weekly gains since the middle of 2020, with the ICE Brent front-month futures up 21% WoW to settle at $118.11 / bbl and NYMEX WTI benchmark gaining 26% to end the week at $115.68 / bbl. Oil surged throughout the first days of the month as the United States and allies heaped sanctions on Russia that, while not aimed at Russian oil and gas sales, nonetheless squeezed its industry, and threatens a growing supply crunch in coming months. But the real catharsis of the blister rally on the oil markets happened on next Monday (March 7, 2022), when crude oil prices soared more than 10% a day to reach their record levels since the middle of 2008 year with ICE Brent trading close to $140 / bbl as the risk of a U.S. and European ban on Russian product and delays in Iranian talks triggered what was shaping up as a major stagflationary shock for world markets. Later in the month, the International Energy Agency (IEA) said that prices could move significantly higher in the coming months, adding that the oil markets are in an emergency that could get worse as Russia’s oil output could slump by about a quarter next month, inflicting the biggest supply shock in decades as buyers shun the nation’s exports.
Nevertheless, crude oil pared earlier gains in the middle of March 2022 as news about progress in peace negotiations between Russia and Ukraine as well as a lack of conformity among European countries regarding ban on oil and gas export from Russia pushed prices back to $100 a barrel. A renewed COVID-19 outbreak in China has also compounded the move, as the country has imposed some its biggest virus-related restrictions since early 2020. President Xi Jinping pledged to reduce the economic impact of his COVID-fighting measures, signaling a shift in a longstanding strategy that has minimized fatalities but weighed heavily on the world’s second-largest economy. Moreover, an earlier spur in oil prices along with many other commodities fanned inflation, providing a challenge to central banks and governments as they seek to encourage economic growth after the pandemic. The Federal Reserve had to raise interest rates and signaled further hikes to tackle the fastest price gains in four decades.
Despite to a powerful sell-off on the crude oil markets, which followed the spike to nearly $140 / bbl on March 7, 2022, both ICE Brent and NYMEX WTI benchmarks again ended the period under report deeply in the green zone, for the third month in a row. The ICE Brent front-month futures contract shot up by $15.16 / bbl in comparison with the level of February 18, 2022, or shocking +16.2%, and ended the period at roughly $108 / bbl as of March 18, 2022. The NYMEX WTI near-month contract skyrocketed by $14.33 / bbl, or +15.7%, over the same period of time, staying slightly above $105 / bbl as of March 18, 2022.
Total crude oil production in the OPEC as a whole grew in February 2022 by 380 thsd bbl / d in comparison with the volume of the previous month, or +1.4% MoM, a significant speed-up of the growth relative to several preceding months.Recall that the OPEC+ constantly agreed to intensify its output by 400 thsd bbl / d per month for more than a year. In monthly terms, crude oil output of the cartel continued to expand during 10 consequent months and reached its new maximal level since April 2020, equal to 28.55 mln bbl / d. So, on an annual basis, OPEC’s crude oil production exploded in February 2022 by 3.52 mln bbl / d relative to the volume of February 2021, or solid +14.1% YoY. From a point of view of yearly dynamics, the cartel continued to improve its crude oil production for 10 consequent months. The most considerable monthly increase of the production in the month under review was recorded in Libya, where the output built up by 170 thsd bbl / d, or impressive +17.9% MoM. Such a considerable monthly growth of the production in the country was attributed to its weak performance during several preceding months. Saudi Arabia delivered a solid expansion of its oil output in February 2022 as well. The production in the state increased by 110 thsd bbl / d as against the previous month, or +1.1% MoM. The extraction of crude oil in Saudi Arabia built up to its new maximum mark since April 2020 equal to 10.17 mln bbl / d.
On its most recent 26th OPEC and non-OPEC Ministerial Meeting, the OPEC+ completely ignored market fears of possible supply outages on the global crude oil market due to escalation of the Russia-Ukraine conflict that has already resulted in logistic problems and certain restrictions on oil and gas export from Russia. On one hand, it was attributed to the fact that Russia is one of the major oil producers within the group. On the other hand, it was attributed to the fact that all the OPEC+ members benefit heavily from current record crude oil prices which surpassed the threshold of $100.0. So, the OPEC+ again didn’t make a step to ease market conditions and just reconfirmed its previous production adjustment plan and the monthly production adjustment mechanism. More exactly, the Meeting decided to adjust upward the monthly overall production by 0.4 mln bbl / d for the month of April 2022, as per the attached schedule, extended the compensation period until the end of June 2022 and reiterated the critical importance of adhering to full conformity. The next 27th OPEC+ meeting is scheduled for March 31, 2022.
Total oil production worldwide proceeded to increase in February 2022 on a monthly basis for the third month in a row and climbed up further by 708 thsd bbl / d as against the volume of January 2022, or +0.7% MoM. The volume of the output finally grew above the level of April 2020 and therefore moved closer to the threshold of 100.0 mln bbl / d. On an annual basis, the production still delivered a very profound rate of expansion. In February 2022, the global output improved by a sizeable amount of 9.51 mln bbl / d in comparison with one year ago level, or +10.5% YoY. It was the 11th consequent month of expansion of the global production in yearly terms. On the one hand, the most significant monthly growth of oil output on an absolute basis in February 2022 was registered in the other Ex-USSR states. The aggregate output of these countries grew by 72 thsd bbl / d relative to the volume of January 2022, or +2.3% MoM, and reached its new marginal maximum mark of 3.13 mln bbl / d since April 2020. In relative terms, the most material monthly growth of oil production in February 2022 was demonstrated in Ecuador, where the extraction of oil improved by 36 thsd bbl / d, or +7.7% MoM, the second consequent month of expansion in a row. Mexico also showed a more moderate expansion of its oil output in February 2022 from a monthly change standpoint. The production in the state built up by 30 thsd bbl / d as compared to January 2022, or +1.6% MoM. On the other hand, the most formidable monthly drop of oil production in the month under consideration was demonstrated in the US, where the production decreased in February 2022 by 136 thsd bbl / d as against to January 2022, or -0.7% MoM, the third consequent month of oil output decline. On a relative basis, the most significant decrease of oil production in February 2022 was observed in China, where the output went down by 88 thsd bbl / d relative to the month prior, or -1.7% MoM. On a monthly basis, it was the most material decline of oil production in China for recent 3 years.
Primary domestic oil production in the US, counted as the sum of crude oil and NGLs production, continued to expand in February 2022 on a monthly basis for the 5th month in a row, according to the weekly US DOE data, though the dynamics of the overall oil output in the country during the month again was negative. More precisely, the primary US oil production increased in February 2022 further by 30 thsd bbl / d in compare to January 2022, or +0.2% MoM, and finally surpassed the level of April 2020 (17.35 mln bbl / d), though by only a marginal amount. As against to the pre-pandemic level of February 2020, the primary oil production in the US was lower in February 2022 by roughly 630 thsd bbl / d. On an annual basis, the primary domestic oil production in the US again delivered strongly positive dynamics in February 2022. More exactly, it expanded by 1.67 mln bbl / d in contrast to one year ago level, or impressive +10.6% YoY. From a yearly change point of view, the primary US production kept on to grow within consequent 10 months. Along with the month prior, the monthly expansion of the primary domestic oil production in the US in February 2022 was fully attributed to the increase of the NGLs production, while the output of crude oil in the country, on the contrary, continued to decline relative to the previous month.
Total output of shale oil in the US restored completely in February 2022 after its drop in January 2022 (the first one over last 10 months). Relative to the month prior, the production expanded by 153 thsd bbl / d, or +1.8% MoM. So, the output of shale oil in the country returned back very close to its highest level since March 2020. In yearly terms, the output of shale oil in the US demonstrated a very strong expansion in the month under consideration. The growth was equal to more than 1.9 mln bbl / d, as compared to the level of February 2021, or impressive +28.1% YoY. It was the fastest annual expansion of shale oil output in the US over last 3 years and the 10th consequent month of growth in yearly terms as well. The most formidable growth of shale oil production in the month under review was registered in the Permian field, the largest one among all US shale oil deposits. The output on the deposit ramped up in February 2022 by 126 thsd bbl / d relative to one month ago level, or +2.5% MoM. Bakken and Niobrara deposits experienced a smaller expansion of their shale oil production in February 2022 on a monthly basis. In particular, the output on the deposit of Bakken grew within the month under review by 1.3% MoM, or +15 thsd bbl / d. The same time, the production on the deposit of Niobrara went up in February 2022 by 11 thsd bbl / d as compared to the volume of January 2022, or +1.7% MoM.
According to the most recent IEA monthly report, surging oil and commodity prices, if sustained, will have a marked impact on inflation and economic growth. While the situation remains in flux, the IEA have lowered its expectations for GDP and global oil demand in March 2022. The agency now see total oil demand growing by 2.1 mln bbl / d on average in 2022, a downgrade of around 1 mln bbl / d from its previous forecast. More exactly, the IEA have revised down its forecast for world oil demand by 1.3 mln bbl / d for 2Q22-4Q22, resulting in 950 thsd bbl / d slower growth for 2022 on average. Total demand is now projected at 99.7 mln bbl / d in 2022. There are actions governments and consumers can take to cut short-term demand for oil more rapidly to ease the strains. According to the IEA, the current crisis comes with major challenges for energy markets, but it also offers opportunities. Indeed, today’s alignment of energy security and economic factors could well accelerate the transition away from oil.
Total commercial stocks of crude oil and petroleum products in OECD states continued to go down in December 2021 for the 12th consequent month and dried up by further 38.9 mln bbl relative to the level of the previous month, or -1.4% MoM. The volume of the inventories sank below the threshold of 2 700 mln bbl for the first time since the middle of 2014 year, remaining well below the average and minimal levels for this month of a year over last 5 years. In annual terms, total commercial stocks of crude oil and petroleum products in OECD states obviously showed strongly negative dynamics in December 2021 as well, the same as during several preceding months. The volume of the stockpiles collapsed by 336.7 mln bbl in compare to one year ago level, or -11.1% YoY, a certain slowdown of the decline relative to November 2021.
According the preliminary IEA assessments, OECD total crude oil and petroleum products stocks were drawn down by 22.1 mln bbl in January 2022. At 2 621 mln bbl, inventories were 335.6 mln bbl below the 2017-2021 average and at their lowest level since April 2014. The stocks covered 57.2 days of forward demand, down by 13.6 days from a year earlier. Early data for the US, Europe and Japan indicate that total stocks continued to fall in February 2022 and decreased by a further 29.8 mln bbl during the month.
Total stockpiles of crude oil and petroleum products in the US reversed to the downside in February 2022 after two months of expansion in a row and diminished by 9.4 mln bbl as against to the month prior, or -1.2% MoM. On an annual basis, total inventories of crude oil and petroleum products in the US delivered a much more significant contraction in the month and tumbled by sizeable 92.5 mln bbl, or -10.6% YoY. The inventories in the US proceeded to deplete on a yearly basis for 11 months in a row. The monthly reduction of the overall oil stocks in the US in February 2022 was caused by both a drop of petroleum products inventories and a decline of the stockpiles of crude oil, though the main cutback was observed in the inventories of refined oil products.
Crude oil inventories in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) continued their negative dynamics in February 2022 for the second consequent month and lost another 7.7 mln bbl relative to the level of the preceding month, or astonishing -25.3% MoM. It was the sharpest monthly drop of the volume of the stockpiles in the storage over recent decades. So, the stocks sank to their lowest level since July 2018 equal to just 22.8 mln bbl. Obviously, the volume of the stocks in Cushing remained well below the lower border of the range for this month of a year over last 5 years. Recall that in recent 20 years there was the only month, when the inventories in the Cushing storage tumbled below the threshold of 20.0 mln bbl, namely July 2014. On an annual basis, crude oil inventories in Cushing likewise showed a very steep decline within the month under review and collapsed by 25.5 mln bbl relative to one year ago level, or -52.8% YoY. It was the 11th month in a row of Cushing stocks depletion in yearly terms.
In February 2022, total floating inventories of crude oil around the globe continued to fluctuate in a tight range around the level of 95.0 mln bbl for the fourth consequent month. To be more precise, this time the inventories marginally decreased by 0.3 mln bbl in compare to the month prior, or -0.3% MoM. Therefore, the floating oil stockpiles again remained well above the average level for this month of a year over last 5 years. Meanwhile, the global floating inventories of crude oil showed positive dynamics in the month under review on an annual basis. Thus, the stocks expanded by 9.6 mln bbl relative to the level of February 2021, or +11.2% YoY. On the one hand, the most material monthly depletion of crude oil stocks that held on floating storages in February 2022 was recorded in Asia. The volume of the stocks there dropped by 6.1 mln bbl relative to one month ago level, or -9.0% MoM, after two consequent months of expansion. On the other hand, the most considerable monthly expansion of the volume of crude oil that held offshore in February 2022 was recorded in the Middle East Gulf, where the inventories expanded by 2.9 mln bbl in compare to January 2022, or +48.5% MoM.