OPEC doesn't expect oil market recovery to be derailed by central banks' inflation fight

OPEC warned Jan. 18 of a choppy oil market ahead, between lingering COVID-19 hotspots, surging inflation and ongoing supply chain disruptions, but said the continued emergence of the world economy from the pandemic in 2022 should keep crude prices supported throughout the year.

In its closely watched monthly oil market report, the producer bloc noted the likelihood of central banks responding to rising inflation rates by tightening monetary supply. In the case of the US, a strengthening dollar could hurt oil prices, but OPEC said the expected interest rate hikes will come as demand for transportation fuels rises this summer, more than offsetting any impact.

"Monetary actions are not expected to hinder underlying global economic growth momentum, but rather serve to recalibrate otherwise overheating economies," OPEC said. "However, as long as COVID-19 in combination with the challenges of supply-chain bottlenecks and inflation will impact the global economic momentum, a volatile growth pattern will remain."

The risk of inflation has become a significant policy concern for major oil consuming countries, with the rapid rise in energy costs prompting many of OPEC's key customers to press the bloc and its allies for more crude supplies.

The OPEC+ coalition -- an alliance between the organization and 10 partner countries led by Russia -- has been gradually lifting its production quotas by 400,000 b/d each month, a pace that has not brought much relief to the market, with front-month Brent futures hitting a seven-year high above $88/b ahead of the report's release.

Fading concerns over the omicron variant, along with the inability of many OPEC+ members to actually hit their production targets, have contributed to the recent rise, even with many forecasters projecting a supply surplus for the first half of 2022.

Indeed, OPEC's market analysis shows demand for its own crude will fall to 27.89 million b/d in the first quarter, roughly the same as the 27.88 million b/d the group pumped in December, but already planned quota hikes in January and February should take the bloc above that level.

But the rest of 2022 should provide more optimism for OPEC, as the call on its crude then increases to 28.30 million b/d in the second quarter, 29.30 million b/d in the third and 29.84 million b/d in the fourth.

"While the new omicron variant may have an impact in 1H22, which is dependent on any further lockdown measures and rising hospitalizations levels impacting the workforce, projections for economic growth remain robust," OPEC said.

Upcoming meeting

For the full-year 2022, OPEC kept its oil market forecast unchanged from its December assessment, with demand projected to increase 4.15 million b/d to hit 100.79 million b/d, while non-OPEC supply will lag behind at 3.02 million b/d of growth to reach 66.66 million b/d.

Meanwhile, OPEC crude production rose 170,000 b/d in December, led by Saudi Arabia and Angola, the report stated, with disruptions in Libya and Nigeria preventing the group from further gains.

The OPEC+ alliance will pore over those figuress when it meets Feb. 2 to decide on March output levels.

OPEC+ countries will remain "a reliable supplier of hydrocarbons, supplying the world with its requirements when some other countries that used to be major suppliers are lagging behind because of natural decline," UAE energy minister Suhail al-Mazrouei said Jan. 17 at an energy conference in Dubai.

The OPEC analysis said it expects light distillates, primarily in the petrochemical sector, to drive oil demand growth in 2022, while road transportation fuels should also reach pre-pandemic levels. However, business travel continues to struggle, OPEC noted, with jet fuel demand not projected to see a full recovery in 2022.