Oil in 2022: There & Back Again, a Barrel's Tale
5 key themes that drove the oil market to the second-highest level on record before ultimately giving almost all of it back
Happy 2023 to all Commodity Context readers! I hope you had a wonderful holiday season; we had frigid cold, blizzardy weather followed by unseasonably warm (rainy) weather that kept us largely housebound with two rambunctious toddlers. Anyway, welcome back to the grind: I’ve got a packed pipeline of research that I’m looking forward to working through and I can’t wait to bring you along (requests and feedback are always appreciated, of course!).
I spent a bit of the holiday season reflecting (and writing!) on what I considered the most important oil-specific themes of 2022 and I hope you enjoy this resultant post, which is a bit longer than my usual at ~3,500 words and 7 charts (~20 minute voiceover reading).
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Russian Invasion of Ukraine: Russian production confounded expectations for a post-invasion collapse amidst a historic export pivot to Asia; now, the latest round of G7 sanctions targeting Russian tanker logistics show early signs of renewed pressure on shipments, but only time will tell if export reductions will stick.
Chinese Demand and COVID-Zero: the oil market faced one final (hopefully?) pandemic plot-twist in 2022 as Beijing desperately tried to maintain its untenable COVID-zero policy stance, strictly locking down hundreds of millions of citizens and crushing domestic oil demand; from the most stable source of demand through 2020-21, Chinese petroleum product demand in 2022 is now expected to have contracted on an annual average basis for the first time in decades.
SPR Intervention: the Biden Administration embarked upon an unprecedented market intervention using the largest-ever emergency release from the Strategic Petroleum Reserve (SPR) following the Russian invasion; the market will need to contend with the prospect of a more active SPR in 2023, especially given planned pilot repurchase programs already scheduled for February.
OPEC+: the producer group experienced a rocky reentry from its pandemic cut as roughly one-third of the the aggregate cut remained off market when the deal technically wound down in August; market conditions may have prompted another major cut beginning in November but there is no doubt that OPEC+ production capacity has materially eroded over the past three years of underinvestment.
Refiners’ Unbalanced Barrel: downstream joined the upstream excitement in 2022, with a period of acute tightness on the back of both an accelerated loss of legacy facilities and a delayed start of new plants due to the pandemic; shortfalls continue to be felt most acutely in diesel markets, while, at the same time, efforts to satisfy diesel shortfalls continue to oversupply other products like fuel oil and naphtha; looking ahead, a combination of more supply of and lower demand for diesel is expected to normalize that product-level dislocation.
Brent crude oil ended 2022 at $86/bbl, up $8/bbl on the year. To the uninitiated observer, this may seem like reasonably strong, steady performance; but, as they say, it’s about the journey rather than the destination. In reality, 2022 was a rollercoaster ride of policy-induced volatility unlike virtually any other in the modern history of the oil industry. From a high of $128 (up $50/bbl on the year) to a low of $76 (down $2/bbl), the ultimate $8/bbl gain is certainly better than it could have been but no doubt represents a post-summer whittled down remnant of what many expected to be a historically strong year.
Still, 2022 was supposed to be the year that crude set fresh all-time highs, or, at least, that’s what a growing chorus of industry watchers (myself included) believed. All the ingredients of a historic bull market were there: rapid demand recovery coming out of the pandemic, plunging inventories, acutely weakened US shale, upstream investment cut to the bone, OPEC+ running into legitimate production capacity constraints, and then the mother of all bullish catalysts in Russia’s heinous invasion of Ukraine and the resultant sanctions and divestment. But, after peaking at around $125/bbl in March and again in June, crude prices eased off considerably, falling as low as $75/bbl in December as the expected collapse in Russian production never materialized, China embarked on draconian COVID-zero lockdowns and cratered domestic demand, and the global economy slowed considerably as inflation raced higher and central banks around the world hiked rates.
2022 will remain one of the most volatile, plot-twisty, and exhausting (at least for me!) oil markets in history—though perhaps only until 2023 gets going. Let’s take a moment to revisit some of the biggest developments of last year’s market and where we stand today.