Renewed market tightness in 2022, which may likely replace repeated warnings over dwindling investment in oil, could give fresh support to oil prices and add impetus to a weirdly cautious investment climate, according to S&P Global Platts.

Given the current circumstances in the oil industry, this may be the best and the worst era to invest as politics take centre stage in dealing with issues within the industry.

As the ongoing energy transition unfolds, fears over stranded assets and the growing push to meet investor goals on climate change will dwell side by side with capital discipline and a potentially sustained higher prices should supply remain limited, Platts said.

Key producers, Saudi Arabia and the UAE as well as top investment banks like Goldman Sachs and JP Morgan warn of a potential mismatch between the ongoing energy needs and the agitations of major oil companies’ reluctance to increase supply that could end up shooting prices higher.

Rene Santos, an oil analyst with Platts Analytics said:

“The uncertainty on future oil prices, as we have had many price cycles in the past 50 years, is producing caution among oil operators, particularly in the US where capital discipline has become a religion… those days of growth in oil production for the sake of growth appear to be finally gone.”
Rene Santos, oil analyst, Platts Analytics

“We’re heading toward a phase that could be dangerous if there’s not enough spending on energy,” Saudi oil minister Abdulaziz bin Salman said this month, as he highlighted the risk of an “energy crisis” this decade.

Joe McMonigle, the secretary general of the International Energy Forum, is also cited to have said recently that two years of massive capex cuts are leading to a supply shortage that could destabilize the global economy. “We can’t let the climate crisis turn into an energy crisis,” he said.

Optimism Exists for the Oil Industry in 2022

Meanwhile, US rig counts have been creeping higher for around 18 months, led by private and independent operators. S&P Global Platts, in its analysis, sees US production returning and exceeding its record peak, it may take a couple of years before that happens.

JP Morgan has also warned that $80/b may be needed to close what it estimates to be a $750 billion capital expenditure gap through to 2030 and to deliver a balanced market in the years ahead.

Both JP Morgan and S&P Global Platts estimate sustainable spare capacity at around 2 million b/d— which lies in the hands of Saudi Arabia and UAE— going into next year.

Indeed, there is plenty of supply optimism for 2022 given the growth stories in Canada, Brazil, Kazakhstan, Norway and Guyana, but questions over the US supply recovery and the risks surrounding volatile Libya supply and that of Iraq persist. Meanwhile, Iran could add 1.4 million b/d of extra crude if sanctions are lifted. Still a rather big if, Platts said.

S&P Global Platts opined that should oil prices remain elevated, even if they don’t reach the $100/b oil price many market participants are anticipating, the incentive to invest in crude will be too much to resist.

“Oil majors that went green in the last two years will show their true colors in 2022,” independent oil consultant Anas Al-Hajji commented, adding that oil prices will be higher next year than in 2021 given the lack of inventory build and robust demand.

Therefore, while several indications show there is a strong market expectation that supply will outpace demand, this could come at a time when stocks need to be replenished including strategic inventories, OPEC+ spare capacity is at a low ebb and US shale growth is foiled by capital discipline.

This could leave oil prices at a level that will revive investment from its waning state even from the most environmentally conscious of energy companies, Platts said. It may well be the appropriate time supposing investment in sustainable energy solutions falls well below meeting those immediate needs.