17 February

2022

The Edge: Why oil is pushing towards US$100/bbl…

…and what will drive the market in 2022
Brent is trading near an eight-year peak, putting oil once again front and centre for investors, consumers and the global
economy. Where does the oil market go from here? I asked Ann-Louise Hittle, Vice President, Macro Oils.

What’s driven prices so high so fast? There’s a lot going on, which we’d boil down to three main factors. First, a second
successive year of extraordinary demand growth is putting massive pressure on infrastructure and global logistics. Shifting
crude from well-head to pump is proving problematic.

Second, oil has joined in the general commodity rally of the last 18 months and has had an important interplay with gas along
the way. Super-high gas prices in Europe and Asia have encouraged arbitrage and some gas-to-oil switching, albeit much lower
volumes than many feared. Both factors helped pull up oil prices.

Third, there have been multiple threats to global liquids supply in the last few months: civil unrest in Kazakhstan, which briefly
reduced production; political disputes and pipeline outages in Libya; ongoing militant attacks in Nigeria; drone attacks on the
UAE; and now the mounting tension in the Russia-Ukraine crisis. Together, these have heightened fears of a supply shortage.

Is the crude market tight? We don’t see an outright shortage. We expect demand to gain 4.5 million b/d in 2022, lifting global
demand above 2019 levels to a record high of at least 100 million b/d. Supply, in turn, is set to increase by 5.1 million b/d. Just
under half is from OPEC as the organisation and its partners in OPEC+ progressively increases output (even if it is below the
0.4 million b/d monthly uplift agreed through September); and 2.8 million b/d from non-OPEC countries.

This cushion, though, could prove fragile, given the experience of the last few months of supply disruption and strong demand.

Will Brent continue to go up? The price risks are still on the upside in the next few months. We currently forecast Brent to
average US$84/bbl in 2022, up from US$71/bbl last year. But any military incursion by Russia into Ukraine could send spot
prices higher still, with consequences beyond the oil market.

Are we seeing a supply response to high prices? Yes, but pretty muted. US tight oil has been global ‘first responder’ in the
past decade. Under pressure from investors, operators this upcycle have kept spend in check and been rewarded for it in the
stock market. We’re forecasting US Lower 48 production to increase by about 0.5 million b/d both this year and next – higher
than market expectations. The Permian basin, already back at record levels, delivers nearly all of that growth.

There’s little evidence yet of independents changing tack to follow ExxonMobil and Chevron, both of which announced big,
Permian-focused budget increases earlier this month. If that happens, any material upside to our forecasts won’t show until
2023.

Is under-investment taking its toll on non-OPEC supply outside the US? Production is still growing in 2022. Nearly all of it
is from just three countries – Russia (in line with planned OPEC+ increases), Brazil (from new fields) and Canada.
The Edge: Why oil is pushing towards US$100/bbl…

We are closely monitoring mature fields for poor performance that might hint at accelerating decline rates. Both the UK and
Norway were subject to downgrades in our latest update, a result of lower investment, poor reservoir performance and revised
timings of projects. It’s too early to tell if this is anything other than a blip that could reverse with higher spend.

We expect global upstream investment to be up 9% in 2022.

Are there risks to demand? The big concern is inflation in OECD and non-OECD countries as rising fuel prices threaten not
only to dampen oil consumption but slow the global economy’s recovery from the effects of Covid-19.

However, oil demand growth shows no signs of faltering yet. After an unprecedented downturn in demand during the crisis of
2020, we’re now in the midst of an equally unprecedented recovery in demand. Consumption growth in 2022 will be the second-
highest annual increase ever. With mobility resurgent in non-OECD countries and jet fuel demand set to recover as Omicron
fears wane, we just upgraded forecasts for both 2022 and 2023 in our February analysis.

What happens if Iran returns to the market? The final talks on the nuclear deal are underway in Vienna. But it’s far from
certain that an agreement will be reached so we assume sanctions remain in place through 2022.

Should there be a breakthrough and sanctions are lifted, Iran could deliver an increase in exports of up to 1 million b/d over six
to nine months. That would go a long way towards dampening any supply fears.

Growth is stronger for supply than demand in 2022

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