Stephanie Kelly, Noah Browning, and Sabrina Valle

NEW YORK, (Reuters) – Whether oil prices drop in 2022 will depend on the performance of two types of producers that are trying to boost their output following the pandemic. These include OPEC and its allies as well as U.S. shale companies.

Globally, rising oil prices and increasing inflationary pressures have resulted from the insufficient response of the global oil sector to the surge demand for fuel in 2021. Global oil demand is close to returning to pre-pandemic levels as the economy recovers, and people return to road, rail, and air travel.

So, to maintain demand and supply, oil is being burned in excess.

Oil benchmark prices rose to new multi-year highs of over $86 per barrel. Some economists fear that crude oil could rise to $100 per barrel and threaten the recovery.

    The International Energy Agency (IEA) expects the roughly 100 million barrels per day (bpd) market to flip into surplus in the first quarter next year, and for supply to outpace demand by 1.1 million bpd, taking some heat out of prices. The energy watchdog predicts that the oversupply will rise to 2.2million bpd by the end of the second quarter.

OPEC and its allies will increase output by 400,000 bpd each month as OPEC+ gradually unwinds the cuts that it had to make in the wake of the pandemic.

However, Tuesday’s IEA monthly report revealed that OPEC+ has not met its target: it produced approximately 700,000. barrels per hour (bpd), less than the September and October levels. This is due in large part to the decline of output from top African producers Angola and Nigeria, which are facing investment and maintenance problems that will likely impact next year.

It could result in a significant reduction of excess oil production and tighten markets for longer. The IEA increased its assumption of an average oil price to $79.40 per barrel, even though it suggested that higher production could offer some relief.

Trafigura, a commodities trading company, warned Tuesday that there would be a tight market for oil. This is partly because of declining production investments and the industry’s transition to cleaner energy.

The United States and large energy consumers in the United States have asked OPEC+ for a faster increase in output, but they refused because of concerns that coronavirus could again reduce demand in the winter.

Now, the market looks to the U.S. shale sector for the majority of non-OPEC production growth over the last decade.

Marco Dunand from Mercuria Energy Trading said, “There is one thing where you can probably increase capacity. That’s shale.

According to the IEA, there will be a huge 480,000 bpd growth in liquids (NGLs), and 1.1 Million bpd in total 2022.

U.S. Energy Information Administration has lower near-term forecasts, and overall crude oil and NGLs production is expected to increase by 220,000 during the second quarter. EIA predicts that the U.S. will see an increase in output in the second quarter of 2022. This would result in a 1.25million bpd rise in crude oil and NGLs.

The response from shale oil producers is slower than it was during the previous price rises. The industry has been subject to greater capital discipline than ever before. Shareholders as well as investors are demanding more from their sector.

Jeffrey Currie, Goldman Sachs’ (NYSE:), head global commodities research, said that the price of a barrel is currently $83 per barrel and there has been no significant increase in rig counts at this summit.

Some say that the shortages of labor and equipment are a problem for Shale businesses, but others claim that demand remains too low to increase output once the sector recovers from the recession caused by the pandemic.

In a recent earnings conference, William Berry (CEO at Continental Resources) stated that “it’s still quite fragile.” I don’t believe it is appropriate for any industry member to overproduce into that fragile and oversupplied market.

LATAM, CANADA RAISE OUTPUT

Non-OPEC Latin American producers have been increasing production. Guyana, an emerging player on the world oil stage is expected to begin production of 220,000 bpd at Exxon’s floating production system in early 2019.

Brazil’s Petroleo Brasileiro SA (the state-owned Petroleo Brasileiro SA) is increasing its 180,000-bpd floating platform Carioca. This floating platform was first produced at Sepia deepwater field, Santos Basin in August.

Venezuela has seen its exports increase after receiving Iranian condensate https://www.reuters.com/world/middle-east/another-iranian-condensate-cargo-begin-unloading-venezuela-document-2021-10-26, but it is unclear if that can be sustained, said Francisco Monaldi, director of the Latin American Energy Program at Rice University’s Baker Institute.

Ann-Louise Hittle from consultancy Wood Mackenzie said that the Canadian supply could increase by around 100,000 bpd during the first quarter. But oil companies at the world’s fourth largest producer may be limiting output.

According to Hittle, total oil supplies should exceed demand by 99.8 millions bpd during the first quarter 2022.

FGE, an energy consulting firm warned that the market supply/demand balance might not be changing quickly as inventories in developed countries are at their lowest level for six years.

“Although prices will probably trend down from last month’s peak, the current low inventory position sustains the risk of prices spiking higher in the next few months,” FGE said.

Paragraph 8 has been corrected to reflect that the IEA raised its price assumptions.