Analysis: Will gasoline prices drop in 2022? It depends on OPEC and U.S. shale

Sherritt International

17/11/2021 06:00

* Oil supply has not kept up with demand as economies
recover
    * OPEC+ maintains slow pace of increasing output
    * IEA, EIA both see big gains in shale production in 2022

    By Stephanie Kelly, Noah Browning and Sabrina Valle
    NEW YORK, Nov 17 (Reuters) - Whether fuel pump prices fall
in 2022 depends on two groups of producers who are struggling to
increase oil output in the wake of the pandemic: OPEC and its
allies and U.S. shale firms.
    The global oil industry's slow response to the surging
demand in 2021 has contributed to soaring energy costs and
inflationary pressures worldwide. As the economy recovers and
populations resume road, rail and air travel, global oil demand
has nearly rebounded to pre-pandemic levels.
    Supply has not recovered so fast - so to keep up with
demand, the industry is burning through oil kept in storage.
    Benchmark oil prices have surged to multi-year highs over
$86 a barrel, and some economists warn crude could surpass $100
a barrel, threatening the recovery.
    The International Energy Agency (IEA) expects the roughly
100 million barrels per day (bpd) market to flip into surplus in
the first quarter next year, and for supply to outpace demand by
1.1 million bpd, taking some heat out of prices. That oversupply
could rise to 2.2 million bpd in the second quarter, the energy
watchdog forecasts.
    Those projections, however, depend on OPEC and its allies
increasing output at 400,000 bpd per month, as the group known
as OPEC+ slowly unwinds cuts it was forced to make during the
pandemic.
    But the IEA's monthly report on Tuesday showed OPEC+ is
nowhere near its targets: it produced about 700,000 barrels per
day (bpd) below those levels in September and October. That is
largely due to top African producers Nigeria and Angola, whose
maintenance and investment problems are likely to weigh on
output next year.  urn:newsml:reuters.com:*:nL8N2QA49E
    If that underproduction continues, it could wipe out much of
the surplus in the first quarter and keep markets tight for
longer. The IEA hiked its 2022 forecast for average prices to
$79.40 a barrel, even as it said higher supply could give some
reprieve.  urn:newsml:reuters.com:*:nL1N2S70JU
    Commodities trading giant Trafigura warned on Tuesday of a
"very, very tight oil market" as declining production
investment, partly due to an industry transition to greener
energy, adds to price pressure.  urn:newsml:reuters.com:*:nL1N2S70BY
    The United States and other big energy consumers have asked
OPEC+ to increase output more quickly, but the group has refused
due to concern coronavirus may again sap demand during the
northern winter.
    The market is now looking to the U.S. shale industry, which
has provided most of the non-OPEC output increase over the past
decade.
    "There's one element where you could probably further
increase capacity, which is shale in the U.S.," said Marco
Dunand, chief executive of merchant Mercuria Energy Trading, at
the Reuters Commodity Trading Summit this week.
    The IEA expects a massive 480,000 bpd rise in U.S. crude and
natural gas liquids (NGLs) output in the second quarter of 2022,
and by 1.1 million bpd for all of 2022. 
    The U.S. Energy Information Administration's near-term
expectations are lower, with overall crude and NGLs output set
to rise by 220,000 in the second quarter. The EIA sees U.S.
output accelerating in the second half of 2022, for a 1.25
million bpd increase in crude and NGLs for the year.
    However, shale producers have responded more slowly than
during previous price rises. Investors and shareholders have
demanded greater capital discipline from the industry than in
previous boom-bust cycles, and are punishing firms that invest
in capacity and rewarding those that pay dividends and reduce
debt.
    "We're at $83 a barrel on Brent, and we see no big surge in
rig counts," said Jeffrey Currie, Goldman Sachs global head of
commodities research, at the Reuters summit.
    Shale companies are grappling with labor and equipment
shortages, while others say demand is still too uncertain to
boost output as the industry recovers from the pandemic-induced
recession.  urn:newsml:reuters.com:*:nL1N2RM23F
    "It's still pretty fragile," said William Berry, chief
executive at Continental Resources, in a recent earnings call.
"I don't think it's appropriate for anyone in the industry to be
overproducing into that potentially fragile oversupplied
market."

    LATAM, CANADA RAISE OUTPUT
    Non-OPEC Latin American producers are increasing output.
Guyana, a relative newcomer on the global oil stage, is slated
to start producing 220,000 bpd of extra capacity at an Exxon-run
floating production system early next year.
    Brazil's state-run Petroleo Brasileiro SA  Petr4.SA  is
ramping up its 180,000 bpd floating platform Carioca, which in
August started production at Sepia deep-water field in the
Santos Basin.
    Venezuela has seen its exports increase after receiving
Iranian condensate https://www.reuters.com/world/middle-east/another-iranian-condensate-cargo-begin-unloading-venezuela-document-2021-10-26,
 but it is unclear if that can be sustained, said Francisco
Monaldi, director of the Latin American Energy Program at Rice
University's Baker Institute.
    Canadian supply could rise by roughly 100,000 bpd in the
first quarter, said Ann-Louise Hittle, vice president at
consultancy Wood Mackenzie, but oil companies in the world's
fourth-largest producer are also restraining output. 
    Total oil supply should reach 99.8 million bpd in the first
quarter of 2022, surpassing demand estimated at 98.9 million
bpd, said Hittle. 
    But energy consultancy FGE warned the market supply-demand
balance may not change quickly with developed countries'
inventories at six-year lows.
    "Although prices will probably trend down from last month’s
peak, the current low inventory position sustains the risk of
prices spiking higher in the next few months," FGE said.

 (Reporting by Stephanie Kelly, Noah Browning and Sabrina Valle;
additional reporting by Marianna Parraga, Ahmad Ghaddar, Olesya
Astakhova and Liz Hampton; editing by David Gaffen, Simon Webb
and Sam Holmes)
 ((Stephanie.Kelly@thomsonreuters.com; 646-223-4471; Reuters
Messaging: stephanie.kelly.thomsonreuters.com@reuters.net))