In December 2021, West Texas Intermediate (WTI) and Brent averaged $71 and $74 per barrel. At the end of January, Brent was above $91 per barrel and WTI above $87. Major investment banks are forecasting crude oil price hikes in 2022 and 2023. Goldman Sachs, for example, estimates that Brent will reach 96 dollars in 2022 and $105 in 2023. Although investment banks’ estimates on the future price of crude oil differ by up to 30%, they agree in forecasting increases because demand currently exceeds the supply of hydrocarbons and the current geopolitical tensions imply significant risks of supply disruptions.
The background to all this is that since the beginning of the pandemic, governments all over the world have imposed closures and bureaucratically designated “indispensable” sectors and increased their spending and debt, disarticulating the delicate capital structure. Logically, oil demand collapsed and inventories grew rapidly, but OPEC production cuts reduced the record inventory buildup and in December 2021 commercial oil inventories in developed economies reached their lowest levels since January 2015.
The Energy Information Agency —EIA— defines spare production capacity as a volume that can be achieved in a maximum of 30 days and maintained for a minimum of 90. Private oil companies do not maintain such spare production capacity voluntarily because of how costly it is. The governments that constitute OPEC assume this cost through state-owned oil companies because, as a cartel, they need it to influence the markets.
The risk premium in the oil market is inversely proportional to OPEC’s surplus production capacity, which in 2020 was equivalent to 9% of world supply and currently stands at 4%. The truth is that with economic recovery limited by the cascading effects of the shutdowns, the inflationary impact of government spending across the West and the current rising oil price, it is logical to expect additional crude supplies towards the end of this year, with US shale production leading the growth in non-OPEC crude production.
So it would be reasonable to expect record oil production levels in the country by 2023, as long as shale oil production continues to increase stimulated by relatively high prices. But recovery from the impact of the shutdowns will be slower than IMF projections predicted in October 2021. And the IMF itself already admitted as much in its January 2022 World Economic Outlook in which it lowered its growth forecasts for most major economies from those predicted three months earlier. Now the IMF forecasts that global growth will fall from 5.9% in 2021 to 4.4% in 2022 and 3.8% in 2023.
What is clear is that in January 2022, the investment bank revised upwards its estimates of the future price of crude oil. By December 2021, the country’s inflation had reached 7 %, its highest level in four decades. And the IMF is beginning to admit that the economic recovery after the impact of the shutdowns will be greater than it initially estimated.
Although the IEA raised its global demand estimates for 2022 due to the easing of the shutdowns, what we have is a scenario of high geopolitical risk, slow recovery, greater impact of the restrictions than what the banking and multilateral analysts were forecasting. And with the USA as the world’s largest oil producer and consumer, we have in Washington an administration willing to risk, for ideological reasons, America’s energy independence. With so many uncertain variables at stake, oil price forecasts are only dubious estimates.