- 2022 was a very volatile year for oil prices
- Geopolitical events forced producers and consumers to make significant changes to the flow of oil around the world
- Here are six lessons taught by the market this year
2022 was a year of substantial volatility for oil markets. For example, the Brent benchmark started the year at $83 per barrel and is poised to end the year in the low $80s, but for almost six months in between, it traded at prices in the triple digits.
Geopolitical events also forced producers and consumers to make significant changes to the flow of oil around the world. For example, Russian oil that traditionally flowed to Europe was rerouted to new markets in Asia. Europe had to find new oil supplies with longer transportation times and higher costs.
Here are six key oil market takeaways for traders from 2022:
1. Renewables Can’t Replace Fossil Fuels
Europe experienced a major electricity crunch after it decided to stop buying Russian natural gas and Russian crude oil. Though the crisis is ongoing, more people are coming to understand that solar and wind power cannot be stable sources of electricity.
The question for 2023 is whether the policymakers who have been pushing to increase renewable energy production will care and/or understand the fallacies of their energy transition plans and correct these errors to ensure that consumers have affordable and reliable sources of power and heat.
2. Saudi Arabia Won’t Come to the Rescue
Despite intense pressure from the United States, OPEC+ refused to increase oil production to bring down high oil prices. The lesson for traders is that Saudi Arabia can be expected to pursue its own best interests and not those of the United States when they conflict.
After many years of low oil prices, Saudi Arabia (and its OPEC+ allies) have benefited from keeping prices higher. They have attempted to do this by restricting production even if it is uncomfortable for U.S. policymakers and consumers.
3. OPEC Can’t Come to the Rescue
Years of low oil prices took their toll on OPEC+ producers, and many are experiencing substantial declines in capacity. Most OPEC+ producers cannot produce at the level their production quotas permit, so OPEC+ quotas don’t reflect the amount of OPEC+ oil actually on the market.
This means that except for Iraq, Saudi Arabia, and the UAE, OPEC+ producers are not able to increase production to push prices down. It also means that when OPEC+ cuts production quotas or increases them, only a fraction of that oil will either leave or enter the market.
4. The United States Isn’t a Swing Producer
U.S. oil producers are no longer able to pursue growth at any cost. Production takes longer to increase now than it did in 2016 and 2017. The U.S. oil industry was never a true swing producer in the global oil market because its oil industry isn’t monolithic and doesn’t act in unison, but in 2022 U.S. producers reacted sluggishly to high oil prices.
U.S. production did not reach 11.98 million bpd until August, despite several months of triple-digit prices in the spring and summer. Traders should expect slower production growth from the U.S. shale industry from now on.
5. China’s Oil Demand Is Crucial:
As economies around the world returned to pre-pandemic levels of oil demand, China stuck with zero-COVID policies that dampened its oil demand. This helped keep global demand from outpacing supply in 2022.
Even though China is relaxing these policies now, traders should not expect Chinese oil demand to suddenly return to pre-pandemic levels. China’s economy, and therefore its oil demand, is controlled by the CCP and will not necessarily follow the same patterns observed elsewhere where economic activity is not controlled centrally.
6. Developing Economies Want Russian Oil
Europe and the U.S. tried to limit Russian oil revenue with sanctions and an ill-conceived price cap scheme. These policies caused dislocation in global oil flows but did not block Russia from accessing new markets.
Russian oil that used to flow to Europe was rerouted to India—a totally new market for Russia. China increased its purchases of Russian oil. Europe is now buying more oil from the Middle East.
Even if Europe and Russia resolve their issues and resume their oil trade, Russian oil will likely continue to flow to India and other new markets. Traders should note that oil flows shifted more quickly than expected, and the period of disruption in the market was relatively brief.
Disclaimer: The author does not own any of the securities mentioned in this article.