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Oil markets outlook for 2022

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Brent oil spot and futures markets have sustained a rally that began in April 2020 by rising over 15 per cent since the start of last month. A similar growth has been experienced in the US West Texas Intermediate (WTI) oil. This is because of tighter supply and rising global demand.

Every stakeholder is looking to answer two lingering questions. First, they want to know individual contributors to both supply and demand-side pressure. That is, they want to understand how the oil market works. Second, they want to know how they can react to take advantage of this bullish trend.

Oil prices, just like any other free-market are determined by the forces of demand and supply. A group of 13 oil-producing and exporting countries (Opec) is perhaps the most formidable supplier.

When combined with the Vienna Group of 10 additional oil-producing countries, the Opec+ group becomes the central authority that influences global oil prices by responding to demand with higher or lower output.

Opec countries produce an estimated 40 per cent of the global daily output while they contribute 60 per cent of the petroleum that is traded internationally.

The Opec+ representatives (Opec and Russia) meet every month to discuss oil outlook and respond to global trends in oil demand and price. The cartel then allocates quotas to its member states that determine oil supply outlook.

Investors follow these meetings to adjust their trading positions optimally. When the bloc raises supply significantly, it is often interpreted as bearish for the price of oil while a production cut often implies higher oil prices. They take advantage of these changes by buying or selling spot crude oil, crude oil futures, energy stocks, commodity currencies, and energy exchange traded funds (ETFs).

As effects of Covid 19 continue to wane, major economies are lowering restrictions while others are dropping them entirely. This has led to increased economic activity and consequently a higher demand for oil.

An estimated 66 per cent of global oil output is used in transportation while 28 per cent is used in manufacturing, three per cent in residential units, two per cent in commercial units, and less than one per cent in electric power production. The reopening of the global economy has led to increased travel, higher manufacturing, and consequently higher demand for oil which has pushed prices higher.

In this light, investors have learned to read the correlation of economic activity with global oil demand. A higher gross domestic product (GDP) implies a higher oil demand.

GDP is easier to predict for most investors thereby making it easier to predict global oil demand with the exemption of black swan events (unexpected event with severe consequences such as Covid 19.

Investors can at times take advantage of bullish oil cycles by purchasing shares of oil companies such as Exxon Mobil and Chevron corporation.

As of this writing, the best performing stock sector in the US stock market is energy. For instance, Occidental Petroleum corporation is up 39 per cent while Halliburton company is up 38 per cent since the beginning of the year.

There are risks involved when trading the oil markets. These include uncertain events that may affect the global oil supply or demand. For instance, the current tensions between Russia and Ukraine is increasingly indicating that Russia could invade Ukraine.

This could lead to geopolitical stress and sanctions that may impact global supply. Since such an event could affect supply negatively, investors are already pricing in that probability thereby pushing oil prices even higher.

Another oil market risk to consider is a price war. For instance, in quarter one 2020, Saudi Arabia engaged a price war with Russia where they flooded the market with excess oil thereby leading to extremely low oil prices.

At one point in April 2020, US crude oil was trading at $8.16 per barrel. This was later followed by a bull run to the current price of $89.20 per barrel.

Another wildcard to consider is the current sanctions on Iran oil by major world powers. Iran is currently negotiating a nuclear deal with President Biden which when agreed on, would allow Iran to sell its oil in the international markets.

As of 2018, Iran was exporting 2.8 million barrels per day before former president Trump pulled off the nuclear deal and imposed sanctions. A deal with Iran could easily hike the global oil supply hence lower the overall price significantly.

Major investment bankers from top investment banks across the world are speculating that global oil prices could rally to $100 per barrel in 2022. This is because of rising demand. Additionally, Opec+ countries have indicated that they will increase oil supply gradually albeit at a slower pace than demand we are experiencing.

To participate in this broad opportunity galore, you can open an online account with a Capital Markets Authority regulated broker, deposit money and start trading. If you are a beginner, you will need to invest time in educating yourself and a mentor to show and guide you through the journey.

Rufas is a Markets and Research Analyst at Scope Markets Ltd