Oil Spikes on Expected Demand Gain, Geopolitical Tensions

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Tuesday's session sharply higher. Futures were helped by an upbeat demand forecast from the Organization of the Petroleum Exporting Countries that estimate a limited impact from the omicron-led surge of coronavirus infections on global oil consumption this year and on escalating tensions in the Middle East as well as at the Russia-Ukrainian border that threaten to disrupt the petroleum flow from the key energy-producing regions.

In its latest Monthly Oil Market Report released Tuesday morning, OPEC held steady its demand forecast this year at 96.4 million barrels per day (bpd) for an annualized growth of 5.7 million bpd. For the fourth quarter of 2021, the cartel upgraded its demand estimates by 260,000 bpd, citing only a limited impact from the omicron surge on mobility trends in industrialized countries. Still, economists at OPEC warn that "while the impact of the omicron variant is projected to be mild and short-lived, uncertainties remain regarding new variants and renewed mobility restrictions, amid an otherwise steady global economic recovery."

Traders were lent buying support on the latest demand projections, particularly in light of growing concerns over OPEC+'s ability to raise production this year. In the same report, OPEC said it raised production by 166,000 bpd in December to 27.88 million bpd compared with 253,000 bpd allowed under the joint OPEC/non-OPEC agreement to boost supplies. Nigeria along with smaller producers in Africa and Latin America once again missed their production targets last month amid political turmoil and chronic underinvestment. Crude oil output increased mainly in Angola, Saudi Arabia, Iraq and the United Arab Emirates, while production in Libya and Nigeria declined. Libya suffered the largest month-on-month drop in crude oil production in December, down 119,000 bpd to 1.092 million bpd, plagued by port and field closures. The shutdowns accelerated further this month, pressing the nation's production down to around 600,000 bpd before eventually recovered to above 1 million bpd.

Further supporting the sentiment is a continued ramp-up in tensions along the Russian-Ukrainian border that was a key factor in sending natural gas prices across parts of the European Union to record highs this winter, with a spillover effect into broader energy markets. On Tuesday, Moscow ordered its embassy staff in Kiev to begin an evacuation process -- a possible clue of further escalation in the ongoing conflict. Russia has amassed nearly 100,000 troops along the Ukrainian border and was carrying out military drills from Jan. 14, according to wire services.

Russian President Vladimir Putin has demanded concessions from the North Atlantic Treaty Organization that would effectively rewrite the post-Cold War security establishment on the European continent. Analysts believe the demands are a nonstarter that could open the door for the invasion of Ukraine -- a major transit route for Russian gas into Europe, with flows meeting around 14% of EU gas demand. Europe's gas storage has depleted to the lowest seasonal level in a decade at the start of the year despite a relatively mild winter so far. Ultra-high prices have given suppliers an incentive to reduce new gas purchases and instead run-down existing stocks in the expectation of refilling storage more cheaply after the winter season.

In the Middle East, Iranian-backed Houthis rebels carried out a deadly drone attack on Emirati key oil infrastructure over the weekend, striking refining complex in Mussafah and international airport in Abu Dhabi. UAE's national oil company, ADNOC, said Tuesday morning that it is taking necessary steps to ensure uninterrupted product flows between fuel terminals and export ports.

The attack became the latest in a series of assaults carried out by Iran-backed militia on oil infrastructure in Gulf states and marked a sharp escalation in the proxy war between Saudi Arabia and Iran. The UAE has been part of a Saudi-led military campaign against the Houthi rebels in Yemen since 2015. In 2019, the UAE said it reduced its forces in Yemen as part of a "strategic" redeployment. Security incidents in the region, meanwhile, have been rising, with 30 attacks on oil and shipping recorded in 2021, up from eight in 2018, according to the Platts Oil Security Sentinel.

The UAE is OPEC's third-largest oil producer, pumping 2.880 million bpd in December, behind only Saudi Arabia with 9.932 million barrels (bbl) in daily oil production and Iraq with output of 4.270 million bpd.

On the session, West Texas Intermediate futures for February delivery advanced $1.61 to settle at $85.43 per bbl, and ICE March Brent crude crested over $87 per bbl to $87.51, up $1.03 on the session. NYMEX February RBOB futures gained 1.28 cents to $2.4318 gallon, and the front-month ULSD contract surged 3.97 cents to $2.6740 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges