The International Energy Agency (IEA) will not publish its Monthly Oil Market Report until January 19, but with its head Fatih Birol saying “Demand dynamics are stronger than many of the market observers had thought” it is safe to assume the IEA will also lower their recent forecast for a 1Q22 surplus of 1.7 million barrels a day and 2 million barrels a day in 2Q22.
Major US shale oil producers such as Occidental Petroleum last year and more recently Pioneer Natural Resources have increasingly abandoned their forward hedging activity. Since the shale oil revolution began more around a decade ago, forward hedging has been a constant feature by many of these oil producers. During periods of ample supply, the idea made sense as forward prices traded higher than the spot market. In addition, the sector borrowed billions of dollars to pump at will, but in order to do so several were forced to hedge some of their production in order to receive their credit lines.
Surging prices since the pandemic low point, and a newfound discipline among producers cutting back their debt has given several producers the financial freedom to manage their cash flows as they see fit. But behind the decisions obviously also lies a belief that oil prices will remain at current or potentially higher levels going forward. Not least considering robust demand and dwindling spare capacity as seen through the inability by several OPEC+ members in raising production.
Despite a continued, but reduced worry about the omicron variants impact on mobility, and with demand for fuel, the outlook for crude oil remains supportive, and we maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.
Global oil demand is not expected to peak anytime soon and that will add further pressure on spare capacity, which is already being reduced on a monthly basis, thereby raising the risk of even higher prices. The timing of which hinges on Brent’s short-term ability to close above $85.50/b, the 61.8% retracement of the 2012 to 2020 selloff, followed up by a break above the double top at $86.75.