Oil
The major factor driving these gains was that demand bounced back much stronger than expected due to the economy's resilience and performance that exceeded expectations. Adding to this was the supply side which remained constrained and has been returning to pre-pandemic levels at a much slower pace.
As we enter 2022, the supply and demand dynamics behind oil are much different than what we were facing as we entered 2021. It is helpful to provide an update on these dynamics for the new year.
Demand
In the near-term, oil demand will continue to rise along with economic growth. And, there could be unexpected surges in demand this winter due to so many plants in Europe being offline for maintenance and the uneven transition to renewable energy.
Further, metrics like travel volume, miles driven, and gasoline consumptions are already above pre-pandemic levels. At the same time, the industrial sector is expected to continue growing given that global growth continues to pick up steam, infrastructure spending is off the charts across the world, and we are in the beginning stages of a massive, CAPEX boom.
And as more people across the world, enter the global middle class, rising oil demand is inevitable for their lifestyles. Despite these reasons to expect increased demand, it's likely to peak as efficiencies keep improving, increasing renewable energy, and the use of EVs.
Supply
The supply situation has improved significantly in the near term. Companies are increasing production as has OPEC, and there are signs that the shale patch is coming back to life in fits and starts.
But in the longer term, the supply problems remain. All of this increased production is just tapping oil that was already in production. We still are in a situation where we have underinvested in new oil production over the last decade, and this is certainly going to matter especially if oil demand can continue rising above 100 million barrels per day. Another way this shows up is oil companies are making huge profits but are using the cash flow (for the most part) to pay off debt or buy back shares rather than invest in new projects that may not be cash flow positive for many years.
Conclusion
For the next few months, the demand side is what should keep driving oil higher into 2022 albeit at a slower pace than before. It will be important to watch supply to see how it reacts to higher prices and whether companies finally make the necessary investments to grow supply.
