Commodity Market: Energy In 2022 – What, How, What’s Next

Energy is one of the main categories under the umbrella of commodities. Energy generally includes crude oil, heating oil, natural gas and gasoline.

This year, the global oil and gas situation has been stirred by multiple factors including geopolitical, market, and economic risks. To be specific, there is the Russia-Ukraine war, the Covid-19 pandemic, the U.S. inflation and not to forget the looming winter.

What Is Affecting The Energy Prices In 2022

In early 2022, February, the Russia-Ukraine war has not only brought geopolitical risks but also economic risks to energy. With the conflict, several sanctions were imposed on the Russian oil, causing energy prices to rise.

Read up on our “In The Face Of The Russia-Ukraine War, Commodity Trades Lead Markets Into Volatility Zone” to find out how the war has affected the commodity’s performance during the peak of the conflict.

According to the September and October 2022 short term energy outlook (STEO) released by the U.S. Energy Information Administration (EIA), the reports underlined a few particular affairs factoring into the increased uncertainty in the crude oil market and their forecast.

Here are the affecting factors flagged by the EIA’s September 2022 STEO:

The impact of Organization of the Petroleum Exporting Countries Plus (OPEC+) to reduce crude oil production by 0.1 million barrels per day in October, alongside the possibility of further production cuts in the future.

The threat of increasing conflict following the outbreak of violent clashes in the Libyan capital of Tripoli.

Uncertainty around the potential expiration of the current coordinated petroleum release from strategic reserves in November.

The potential return to an Iran nuclear deal that could lift sanctions on the country and allow Iran’s crude oil exports into the market.

The risk of hurricanes that could result in potential production outages and limited export traffic along the U.S. Gulf Coast.

The major takeaways flagged by the EIA’s October 2022 forecast on global liquid fuels include:

Potential petroleum supply disruptions and slower-than-expected crude oil production growth could send oil prices higher. Plus, the possibility of slower-than-forecast economic growth may factor into lower prices.

On 5th October 2022, OPEC+ announced to reduce crude oil production by 2 million barrels per day. With this, the OPEC crude oil production forecast sees a decline of USD28.6 million barrel per day from an average of USD29.6 million barrel per day in September 2022 over the fourth quarter of 2022 and the first quarter of 2023.

The U.S. crude oil production in the forecast averages on 11.7 million barrels per day in 2022 and 12.4 million barrels per day in 2023. These numbers would exceed the record high set in 2019.

Overall, energy prices are also affected by the looming risks of a global recession and a weakening demand outlook. This factor continues to weigh on oil markets. Also, China’s persistent Covid-induced curbs clouded the outlook and hampered the oil’s comeback bid on the OPEC+’s production cuts.

At the same time, Energy companies such as Chevron and ExxonMobil are benefiting from soaring energy prices as they reported profits well ahead of expectations this quarter.

How Did Energy Perform Over The Year

Let’s take a look at how crude oil performed with the major influencing factors mentioned above.

Russian-Ukraine War:

The price of Brent crude – the global benchmark for oil prices – rose to around USD130 a barrel on 7th March 2022, the highest level for almost 14 years, following reports that the U.S. and U.K. will announce their own ban on Russian oil imports.

That said, crude oil was trading at the highest in early 2022, with West Texas Intermediate (WTI) crude oil renewing on an eight-year high.

OPEC+ Production Cuts:

In October 2022, OPEC+ has reduced its production, aiming to shore up prices despite U.S.’ pressure to pump more.

Upon the news, the oil prices rose to a three-week high, with Brent crude oil rising by 1.5% to more than $93 per barrel, adding to gains this week ahead of the gathering of oil ministers. Meanwhile, the U.S. WTI oil was up 1.4% at USD87.76 per barrel, marking its highest since 15^th September 2022.

The 2 million production cut from OPEC+ might have possibly spur a recovery in oil prices that saw a drop of approximately USD90 from USD120 three months ago due to the fears of global economic recession, coupled with the surging U.S. interest rates and a stronger greenback.

U.S. Inflation & Looming Recession:

The commodity market has been volatile as the U.S. is experiencing an ultra-high interest rate environment with surging inflation and a looming recession.

During this interval, crude prices have fallen around USD80 per barrel from over USD120 in early June. In addition, the commodities have slumped approximately 20% over the peak of the recession fears.

Towards the third quarter of the year, crude oil’s price was closing at USD88 per barrel on 7^th September 2022, after closing at USD105.09 per barrel near the end of August.

Ultimately, the global oil prices – which soared in the first half of the year – have since dropped sharply, fearing that a global recession will depress demand. Brent crude is down 20% since the end of June. The global benchmark hit a peak of USD139 a barrel in March after Russia’s invasion of Ukraine.

What’s Next

In the August 2022 STEO, the EIA estimated that the Brent spot price would be at an average of USD105 in 2022 and USD95 per barrel in 2023.

To add, Natasha Kaneva, Head of Global Commodities Research at JPMorgan also projected similar estimates where crude oil price in 2023 would be priced around USD98.

Before the 5^th October OPEC+ decision, many experts were predicting that oil prices would remain stable for the rest of 2022 since the inflation concerns have made an impact on consumer spending.

In the October 2022 STEO forecast, the Brent crude oil spot price averages USD93 per barrel in the fourth quarter of 2022 and USD95 in 2023.

The next OPEC+ meeting will be held on 4^th December 2022, and speculators will anticipate on whether the OPEC+ will reverse the move.

Against these backdrops, we shall see if the forecasts and analysis are accurate and how the market will react to it.

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