Global oil price benchmarks are already surging to highs not seen in almost eight years, triggered by a low supply outlook complicated by tensions in the Middle East. Consequently, the short term supply outlook looks very tight. Analysts feel this may offset the impact of central bank decisions further down the line to push prices down if OPEC+ and other factors curtail supplies.

The spectre of inflation still looms, and China’s central bank has unexpectedly cut the borrowing costs of its medium-term loans by 10 basis points, potentially signalling an expansionary monetary policy that would lead the way for increased Chinese GDP, oil consumption and refinery runs.

China may be inciting the bull, but the rest of the world is mostly discussing how to cool down heated post-pandemic economies.

Brent spot trading was this week clawing towards $90 per barrel, a high not witnessed since 2014, amidst a build-up in regional tensions in the Middle East. The Houthi attack raises the geopolitical risk in the region and may signal the Iran-US nuclear deal is off the table for the foreseeable future, meaning Iranian oil barrels are off the market, boosting demand for similar grade crude originating elsewhere.

A mild Omicron impact has increased oil demand expectations for the year, all while the supply picture gets tighter on lowered production in particular from OPEC+ countries. Current prices already reflect a tightening market, as supply outages are not being offset by any negative effect of the Omicron variant in oil demand.

Brent’s march ahead is a signal of Europe’s economic and oil consumption progress expectations for 2022, buoyed in recent days by the lifting of movement restrictions on the continent, where governments are treating Omicron as less life-threatening than previous strains and more as a flu-like virus instead of a health crisis, despite record-high cases.

The Kazakhstan unrest already demonstrates that people are increasingly price-sensitive to oil products, with more “Pandemic Spring” protests related to energy or government handling of Covid-19 being a risk.

The year already kicked off with large-scale supply shortages, led by the fragile political situation in Libya and lower than expected output performance in Russia and Brazil, which may be a harbinger of lower capacity to come.

Russia’s announcement that it is essentially turning off one of its main gas valves, the Yamal pipeline, for European deliveries in February, also lends a bullish spin to the entire commodity basket, especially oil, as demand for heating fuel in China rises with not only cold weather but as an option against expensive natural gas.

Russia has other pipelines to deliver gas to EU markets, but, as always, it is playing its arbitrage card between the premium Asia market and the European LNG sink, which is currently being inundated with cheap US LNG exports that are at record post-pandemic highs.

Analysts are ready to log only low supplies from Iran as nuclear negotiations remain in stalemate, as well as from other core OPEC+ producing countries like Iraq and Kuwait due lower revised production capacities. According to Rystad Energy projections, oil demand this year may average 100 million bpd and in some months surpass 2019 levels, as global road activity hovers around 90 percent of pre-pandemic levels and both domestic and international aviation make up solid territory when Omicron restrictions are lifted. (IPA Service)