5 Key Factors To Watch For Oil In 2022

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By Ileana Garcia Mora

Investing.com - 2021 was a year of significant recovery for the oil market on both the supply and demand sides, thanks to the gradual reopening of the global economy after Covid, the vaccination process that led to increased mobility, and the shortage of natural gas, which raised the demand for crude as a substitute.

As of December 22nd, WTI crude oil prices rose 46.5% for the year to $71.10 per barrel, from $48.52/barrel to a top price of $85.41/barrel, a 7-year high. Meanwhile, Brent oil prices accumulated a 43% gain as of the same date, reaching $73.82/barrel, while touching a high of $86.70/barrel from a low of $50.56/barrel.

2022 could be the "post-pandemic" year for the oil market, as many expect demand to recover 100% to pre-Covid levels. While that offers promise to oil investors, there is still a lot of uncertainty entering the year.

Here are 5 major factors that could be determining factors in the outlook for the oil market in 2022.

1. Weather Conditions: Another Strong Winter Could Push Prices Higher

The price of a barrel of oil could reach $100 - or more - during the first quarter of the year if extremely cold weather, such as that seen last winter, arrives.

In February 2021, the severe winter wreaked havoc in parts of the southern United States, leaving at least 24 people dead and hundreds of thousands without power, as the sudden demand spike exacerbated supply shortages.

"Although the price of WTI is likely to trade in a range between 65 and 90 dollars per barrel over the course of next year, the price of this energy could reach 100 dollars per barrel during the first quarter of the year if extremely cold weather is observed, such as that seen last winter," comments Ana Azuara, manager of Economic Analysis at Grupo Financiero Base.

2. Nervousness About New Covid Variants Threatening the Market

While the peaks of 2020 have passed, Covid is not over yet. Two elements that could continue to threaten the mobility of people and, consequently, the demand for oil: the advancement of vaccination processes globally, and the emergence of new Covid variants.

"On the demand side, fears are expected to continue at least until herd immunity is reached. It is estimated that 70% of the world's population will need to be vaccinated to reach herd immunity. Otherwise, we will continue to see variants that could jeopardize global economic activity and the demand for energy," said Azuara.

To see the risk posed by variants, it is enough to look at what happened in the last week of November 2021 with the emergence of Omicron.

"In the days since Nov. 26, a total of 56 countries have instituted some sort of travel ban designed to ‘guard’ against Omicron," commented Ellen R. Wald, an energy industry analyst, in an article on the subject.

New travel bans could mean new restrictions on people's mobility and temporary flight suspensions, and thus fuel demand problems for fuel and oil.

3. The Specter of Inflation

Inflation has become one of the key issues in 2021 and its impact on the oil market, especially on prices, is one of the concerns traders are keeping an eye on.

In the United States, inflation accelerated to levels not seen in almost 40 years, reaching 6.8%, the fastest increase since June 1982, according to the consumer price index (CPI); meanwhile, the producer price index wholesale prices have risen 9.6%. Concern over accelerating prices at last reached the Federal Reserve, which, in its final 2021 meeting in December, shared projections for three interest rate hikes in 2022.

"When inflation rises, there is corresponding upward force on the price of oil," Wald wrote. "Oil producers are facing higher costs for everything from labor to transportation to parts. In addition, the value of the dollar that they get for selling oil has also declined. Therefore, the desire to sell each barrel of oil for more dollars increases, creating an upward pressure on the price of oil.”

4. OPEC+ and Increased Supply?

There are also fears that the supply of crude oil could increase during 2022, which, coupled with problems in demand, could be detrimental to the oil market.

"According to the IEA, on average global oil production during 2022 will be 101.41 million barrels per day, 5.46 million barrels per day above the average production in 2021. OPEC will continue to increase its oil production, as they have already made clear, even with the appearance of the new Omicron variant," explains Azuara.

OPEC+ remains optimistic about the outlook for oil in 2022. In its latest forecast, it predicted demand of 99.13 million barrels of oil / day in Q1 2022, before reaching pre-pandemic levels by Q3. OPEC+ has taken the view that the Omicron variant will be mild, and expects to increase supply over the course of the year as well. This in the face of the World Health Organization and others still terming the risk posed by Omicron as “very high”.

Undoubtedly, this issue will be a factor in determining the direction of prices in the first quarter of 2022.

5. Geopolitical Tensions: Russia vs. Ukraine and US vs. Iran

The oil market will continue to be affected by other geopolitical factors, which will continue to be a risk, including the trade war between China and the United States, as well as the political relationship between the United States and Iran.

Russia is also a major player, especially on the natural gas side, and is capable of affecting the price of oil.

"Russia is currently the third largest oil producer in the world and could potentially face some sort of sanctions on its oil from the United States as a result of military action in Europe. (Russia also provides more than half of the European Union’s natural gas, and there are also several natural gas pipelines in Ukraine). A conflict involving Russia could spike prices as the world considers what it all means," Wald says in this article.

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The oil market in 2022 could be the year the oil market puts the pandemic in the rearview mirror with a full recovery in demand and supply to meet that demand. In a recent report, the EIA mentioned that it anticipates some "comfort" in the global oil market, anticipating that supply should improve in the face of better demand conditions.

However, factors such as those mentioned above could put pressure back on energy prices. So while oil investors have reasons for optimism, there is still an uncertain path ahead for 2022.

Read also: Inflation, Omicron, Rate Hikes: What To Expect From 2022

See our full outlook series here.