Oil demand faces downside risks; supply shortage not anticipated in 2022 with lots to watch out for

Wood Mackenzie, a Verisk business (Nasdaq:VRSK), releases its Oil markets: 5 things to look for in 2022 report which discusses the uncertainties and issues impacting global demand, oil supply and refining markets this year.                     

Oil demand risks to the downside

The shape and scope of viral outbreaks and governments’ responses place downside risk on economic recovery and oil demand growth in 2022. Additionally, with the pace of inflation accelerating in Q4 last year, consumption could be further hindered bringing downside risk to both economic growth and personal mobility.

Vehicle electrification policy and pace of adoption during 2022 will have ramifications on global transport fuel demand in this decade and beyond. China’s EV subsidy will be eliminated by the end of 2022, after an extension by two years as a response to the pandemic. Wood Mackenzie expects China’s EV sales to continue growing strongly, from 6% in 2020 to 15% for 2021 and 19% for 2022.

Europe’s “Fit for 55” proposed amendments to the Energy Taxation Directive, is removing tax exemptions on aviation and marine bunker fuels sold within, and for use within, the EEA from 2023 onwards. This does require unanimous approval among member states, so will be one to watch in 2022.

Oil supply lining up for strong growth in 2022

2022 global supply is expected to grow by 4.8 million barrels per day (b/d), slightly outpacing demand growth. A shortage of supply is not anticipated for this year.

Non-OPEC is expected to contribute nearly half of the global oil supply growth with North America as the main contributor, with gains from Canada and the US including from the Gulf of Mexico. In contrast to 2021, US Lower 48 crude production is expected to show year-on-year growth. However, operators are still focused on paying down debt and returning funds to investors. Inflationary pressure could also crimp 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 gains in output are expected.

OPEC+ policy to continue as planned

The OPEC+ agreement to increase production across the group by 400,000 b/d each month, until September 2022 is expected to continue. But the OPEC+ producers intend to meet each month to examine the fundamentals and adjust as needed if demand is different than expected.

Wood Mackenzie vice president Ann-Louise Hittle said: “Total OPEC crude oil production is forecast to rise 2 million b/d to 28.3 million b/d in 2022 compared to last year, and gains in Russia’s oil production is also expected.

“Careful management in the monthly OPEC+ meetings will predominate with overall growth expected even if a few of the smaller OPEC producers are unable to show any increases or even see declines in output. A lapse in management of the market is still possible because the group tends to use lagging indicators such as rate of stock fill to make its decisions.”

Global demand lifts refining utilisation, but margins remain below pre-pandemic levels

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

Vice president Alan Gelder said: “We are closely monitoring the activities at Jazan in Saudi Arabia, Al-Zour in Kuwait along with Jieyang and Shenghong in China and Vizag in India as these will make a material difference to East of Suez supply/demand balances.

“However, the largest and most significant capacity addition is the 650,000 b/d Dangote refinery in Nigeria, currently scheduled for commissioning mid-year 2022. Despite these investments, global demand growth is to outpace these capacity additions by 1.6 million b/d, lifting utilisation and improving refining margins. The new normal is, however, a lower range of margins than enjoyed pre-pandemic, as global utilisation is to remain below 2019 levels.”

Developments in China’s policies on its net refining capacity (particularly those added illegally), crude import and refined product export quotas, as well as the start-up of its Propane Dehydrogenation (PDH) units, will be areas to watch.

Downstream portfolio high grading could slow down; greater focus on green strategies

Despite the need for further portfolio rationalisation by the oil majors, plans to divest refineries might lose steam in 2022. The majors and key regional players might be challenged to find enough interest from buyers and investors as divestments of the most attractive assets in their portfolio have already been agreed in the past year. Companies could delay refinery sales and focus on a continued commitment to cost reduction and performance improvement, while developing more detailed energy transition strategies. Alternatively, more announcements of refinery conversions to terminals and bio-sites are something to watch out for.

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

Gelder said: “Finally, a key topic to watch is prices of feedstocks for renewable diesel. The recent wave of green fuels projects has increased demand for vegetable oil and waste products. Can this crunch in prices be considered short-lived? Is there enough feedstock supply to support the ramp up in biofuels that refiners aim to develop?

“Market players with a global presence will have the opportunity to optimise the types and origin of the feed, while local players face tighter conditions, slowing down the pace of biofuels supply growth, and its contribution to achieving net zero portfolios for refiners.”