The path for oil and gas in the first and second quarter of 2022

Supply concerns derived from rising geopolitical tensions in several large oil-producing countries and regions pushed Brent prices to $90 per barrel. These concerns also provided support for projected prices to reach $100 and over amid low inventories in the OECD, concerns about supplies, and falling spare capacity within OPEC+.

Investors remained focused on worries about potential supply disruptions amid geopolitical risks in oil-producing regions.

Equity markets on the other hand saw a sharp sell-off, caused by concerns about a rapid interest rate hike by the US Federal Reserve. This has weighed down on market sentiments and robust global supply and demand outlooks, which offset the downside pressure on oil prices. Nevertheless, in the near term, this may continue to add further pressure on crude oil prices. Data showing a rise in US crude stocks last week had a limited impact on prices.

The Fed’s chairman confirmed that interest hikes would start in March, but did not exclude the possibility that the increases would be undertaken in increments of 0.5 percent, as opposed to the two-decade norm of 0.25 percent.

The tensions between US and Russia, after the latter threatened to invade Ukraine, was the focus of market attention. The US and EU have repeatedly threatened Russia with severe political and economic sanctions if it invades Ukraine.

This has, in turn, raised concerns about Russian oil and natural gas exports potentially becoming significantly constrained.

It is generally believed that it is highly unlikely that the US will ban Russian energy companies from US dollar-denominated transactions, which would remove Russian oil exports from the international market, as this would send crude prices through the roof adding a large risk premium to crude prices

There is a real possibility that the Russia-Ukraine conflict escalates, increasing fears that Russia-Europe gas flows could be disrupted. The resulting tightness in gas markets caused by these political tensions will likely provide support across energy markets in general, including oil prices.

A missile attack on a UAE military base launched by the Houthi militia in Yemen is also a cause of market concerns.

Progress, however, in Iran’s talks with its JCPOA (Joint Comprehensive Plan of Action) counterparts did not seem to impact crude prices either.

According to Russia’s envoy, to revive the JCPOA agreement a deal could be reached by the end of the month, which could allow for a gradual lifting of sanctions as soon as April.

Markets expect little change in tightness in February as well, before stock builds start emerging from March onwards.

China’s crude and product trade flows are facing a number of uncertainties in 2022, particularly at the start of the year. These include efforts to manage COVID-19, achieve environmental targets, and reshape the refining sector.

Next month will be a particularly active time in China, with both the Lunar New Year holiday and 2022 Beijing Winter Olympics taking place. The government is discouraging holiday travel and suspending Olympic ticket sales following a confirmed case of omicron.

It has also directed refineries to cap utilization at 70 percent in an effort to limit winter smog during the games. These restrictions are likely to curtail China’s appetite for imported crude at the start of 2022. However, crude imports are expected to strengthen later in 1H22 and in 2H22, amid the hopeful easing of COVID-19 impacts, surpassing the record high of 10.9 million barrels per day in 2020.

Persisting high gas prices in Europe and ongoing under-delivery of supplies from Russia, amid geopolitical tension, could support switching to oil as a substitute in the coming weeks.

A risk premium will continue to be added to crude prices as long as US-Russia tensions remain elevated. If this tension dissipates in the coming weeks, we should see a downward correction in crude prices, reflecting the projected supply surplus.

Adding to the downside is a potential revision in the IEA’s 2022 demand projections following the IMF’s recent downward revision to its 2022 gross domestic product outlook.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.