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27 Mar 2025
06 Dec 2021 | 10:45 UTC — Insight Blog
Featuring S&P Global Platts
Uncertainties on the potential impact of the omicron variant continues to grip markets this week. Our editors also keep an eye on oil prices after OPEC+ decided to stick to its planned production increase in January, the correlation between implied inflation and energy prices, and China's steel demand.
What's happening? There has been some minor weakness in the number of flights flown globally since peaking the week of Oct. 24 at just over 96,000 flights per day. This softening was concentrated in domestic traffic within China, and a weaker pattern in Europe and the UK. Other regions have experienced generally rising traffic, or in the case of the US, daily flights which remain just slightly below their COVID-19 recovery high. Air traffic correlates very well with global jet fuel demand, which in November 2021 was still down 21% or 1.66 million b/d from its November 2019 pre-pandemic level.
What's next? There is great uncertainty about the impact of the COVID-19 omicron variant, though some countries have already begun to institute enhanced restrictions and screening on travel. Analysis indicates that for every 10,000 daily flights lost, global jet fuel demand gets reduced 600,000-700,000 b/d. Pre-omicron, commercial aviation was expected to increase by about 10,000 flights between November 2021 and July 2022, and then another 5,000 flights by year-end 2022. This would have helped support the continuing normalization of jet fuel demand, which is now—at least in the short-term—very much at risk. By July 2022, jet fuel demand had been expected to narrow its impairment versus pre-pandemic levels towards 10%, and only 5% by year-end 2022. Short-term estimates will most likely need to be scaled back, but flight traffic remains the key indicator.
What's happening? OPEC+ agreed Dec. 2 to go ahead with a 400,000 b/d production increase for January, despite concerns over the impact of the omicron variant and the release of coordinated strategic petroleum reserves. Domestic economic factors are also playing a role in OPEC+ members' approaches to oil production volumes. Russia has a strong economic position within the alliance and benefits from a fiscal rule introduced in 2017, which softens the impact of oil price fluctuations on its economy and budget. This comparative resilience to oil price shocks has led it to frequently push for increases to its production quota under the deal. Russia also has a low fiscal breakeven oil price within the group. However, S&P Global Platts Analytics sees the gap between Russia and Saudi Arabia's fiscal breakeven oil prices as lower now than before the pandemic. Platts Analytics estimates Saudi Arabia's fiscal breakeven price at $79/b Brent in 2021, down from $87/b in 2020. It estimates Russia's breakeven price at $69/b Brent for 2021, also down from $76/b in 2020, but well above the pre-pandemic average of $52/b in 2018-19.
What's next? The OPEC+ group is scheduled to meet to decide February output levels on Jan. 4. Lower fiscal breakeven oil prices may help Russia and OPEC's core Persian Gulf producers align their production policy in 2022. Platts Analytics sees 2022 fiscal breakeven oil prices coming down further on higher crude production volumes.
What's happening? There's a strong correlation between implied inflation—measured as the difference between US nominal interest rates and inflation protected rates—and energy. Implied inflation, on a 10-year basis, has fallen from 2.76% on Nov 15, to about 2.45% most recently. Energy commodities, as measured by the GSCI energy subindex—composed of crude and refined products as well as US natural gas prices—have fallen 21% from its peak Oct. 26.
What's next? Whether actual inflation metrics ease remains to be seen, while the US Federal Reserve has begun to taper its asset purchases and is likely to begin raising interest rates sometime in mid-2022. If the economic momentum softens due to the spread of the omicron variant, while the Fed is directionally less accommodative in its monetary policy, inflation may indeed fall and corroborate the decline in implied inflation. Energy ultimately trades on its own fundamentals, though it can take guidance from the broader macro trends, including implied inflation. Winter weather remains a key driver. Weather in the US, while currently warm, will inevitably turn seasonal at some point, with brief colder-than-normal spells likely too and gas markets would again quickly tighten. For oil, the degree of demand destruction set into motion from the previous peak in prices, along with the threat of the new COVID-19 variant remains key, though stock levels are likely to stabilize, or modestly build into Q1. As such, the energy commodity subindex should stabilize, while implied inflation could also stabilize if inflation pressures show prospects of abating.
What's happening? Chinese manufacturing—which accounts for around one-third of steel consumption—recovered slightly in November from energy shortages the previous month. China's manufacturing purchasing managers' index, published by the National Bureau of Statistics, rose to 50.1 points from 49.2 in October. The PMI published by Chinese media company Caixin, on the other hand, fell to 49.9 from 50.6 in October. Both PMIs found that input costs of materials, including steel and other metals, had slowed sharply in November.
What's next? With sporadic coronavirus outbreaks occurring in China, and some ongoing logistics bottlenecks, December could be another weak month for manufacturing. Domestic Chinese hot-rolled coil prices fell 9% over November, averaging Yuan 4,881/mt ($766/mt). Platts Analytics sees the price averaging Yuan 4,650/mt in December, and Yuan 4,850/mt in Q1 2022, on the basis that market conditions will start to improve in March.
Analysis and reporting by Alan Struth, Rosemary Griffin and Paul Bartholomew.
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