In fact, current oil market premium is even more than what the supply situation would warrant. It is more out of expectations of near-term tightness around March and April.

Despite a down-tick early this month in the wake of falling global road and aviation activity as well as the Chinese Lunar New Year holiday and the start of Olympics, most other regions are seeing an upwards trend in road traffic, with the exception of Russia, which together with Omicron news flow gives credence to expectations of a demand increase into March and April as well.

How large this demand increase will be and whether supply will manage to keep up remains to be seen and the market is playing a wait-and-see game for the time being.

Global oil markets seemed to lose a bit of ground as doubts over the ability of OPEC+ to maintain full production capacity persist and the supply outlook remains tight. Simultaneously, traders are bracing for more volatility amidst the hope that OPEC+ crude oil output could bring balance to the market.

The Ukraine question has taken a back seat, indicating that the chance the world’s largest energy powerhouses, in terms of fossil fuel output, may manage to avoid military action, as was the case for the entirety of the Cold War. Neither party wants to turn up the geopolitical heat and fire up energy prices especially when climate-induced price spikes are still a very salient short-term risk and supply chain shortages would likely exacerbate an impact of such an event.

Overall, the market remains bullish on prices as it has since May 2020 when OPEC+ enacted mega cuts to its output bringing oil from negative territory to a quite reasonable jump away from $100 per barrel if the right bull conditions materialize in the coming weeks.

The prevailing expectation is that the market, despite some downward blips caused by pandemic demand scares, will continue to trade high on oil as real supply shortages exist both in the short and long-term view.

While other market players are calling for a prolonged supercycle, the volatility of the market will likely be short-lived and corrected by a response from short-term cycle barrels. Should market volatility continue longer than expected, the bull cycle will be here to stay and oil prices will climb even higher.

Production capacity in Middle East powerhouses Saudi Arabia, Kuwait and the UAE is on hand to boost output by at least 2 million barrels a day. But this is kept in check by the current OPEC+ agreement that caps supply increases voluntarily, despite the market screaming out for more production.

Current prices are far-far above breakeven prices for marginal supplies from anywhere from the US shale patch to offshore, not to mention onshore fields in the Middle East. Analysts say that from an operator’s economical perspective, investments and supply should see a positive jolt some months down the line this year and into the next.

Looking back, OPEC+ has failed to live up to its own pledge of increasing production according to plan, and the group is now trailing its “target production” in January by around 700,000 bpd as Nigeria, Angola, even Russia, and some other smaller producers are lagging their own production targets. Supply disruptions in Nigeria, which produces a lot of “swing barrels” with ideal composition in the current market for refiners, are particularly problematic and support the overall sweet crude markets which now show close to record-strong premiums in prices.

The market is rightfully concerned about supply-demand balances for crude oil into the spring months, especially now that the Omicron risk seems to be fading slowly. In any case, OPEC+ supply growth is key to delivering on the crude supply the market expects will be needed to meet demand in the second quarter. (IPA Service)