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APPEC: 2022 oil supply seen tight amid under-investment, cautious OPEC, demand recovery

Highlights

Oil industry massively under-investing to meet future supply: Hess Corp.

Asian refiners say OPEC+ should hike supply by at least 700,000 b/d

Platts Analytics expects Iranian barrels to return to market by February 2022

Global oil demand seems poised to recover to pre-pandemic levels in 2022, but a sharp decline in upstream investments and OPEC's cautious approach in lifting the group's production volumes could lead to an undersupplied market next year, with Asian end-users and consumers mostly finding crude and commodities prices overheated, industry participants said at the S&P Global Platts Asia Pacific Petroleum Conference Sept. 27.

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Global upstream investments before the COVID-19 pandemic was around $650 billion, but it has tumbled to around $300 billion, a decline of around 50%, said Greg Hill, president and chief operating officer, Hess Corporation during a CEO conversation session at the APPEC.

Click here for our complete APPEC 2021 coverage

"However, the overall global demand relative to projections 6 years ago, inspite of COVID 19, we are not that far off ... so that tells me the industry is massively under-investing to meet future supply," Hill said.

There is a structural underinvestment and global upstream capital expenditure has been lackluster ever since the financial crisis, Trafigura's Chief Economist Saad Rahim said during a panel discussion session at the APPEC.

"The world will still need more than 90 million b/d of oil and the catchup to capex spending needs to happen," he said.

Asian refiners and trading firms also agreed that the pace of global supply increase and upstream investments are lagging, while oil prices appear overheated.

OPEC and its allies agreed Sept. 1 to hike their collective crude production by 400,000 b/d in October, sticking to their initial agreement reached in July to increase output by the same margin each month from August through to the end of 2022.

According to eight major Asian refiners and trading firms surveyed by Platts during the first day of APPEC including ENEOS, BPCL, SK Innovation, Chinaoil, Pertamina and PTT, OPEC+ should ideally raise supply by at least 700,000-800,000 b/d as Asian consumer sentiment is hurt by high prices.

With ultra-low interest rates and aggressive monetary easing policies expected to continue supporting broad assets, commodities and energy prices, Asian end-users and consumers are calling for OPEC+ to at least play its part in controlling the highly inflated oil prices for the benefit of global consumer sentiment and demand recovery.

Broader energy, commodities prices are very high but the global economy is still not on full stream, Rahim said.

"Producers would have to ramp up production ... I expect [the need for such output increase] to become clearer in 2022," Giovanni Serio, head of research at Vitol said during the panel.

Demand recovery

Six out of the eight Asian refiners and traders surveyed by Platts expect Asia's oil product demand to climb back to 2019 levels by no later than Q2 2022, anticipating over half of East Asia's population to be fully vaccinated by then.

Although the slew of movement restriction measures enforced across many states and countries across East Asia and the continued risk of a resurgence of COVID-19 cases will likely continue posing risks to the regional economy, robust consumer and industrial fuel demand recovery is expected to unfold in 2022.

"By 2022, demand in India and South Korea will rise above their respective 2019 levels, in addition to China, taking the regional demand above pre-COVID levels by about 3%," according to JY Lim, oil markets adviser at S&P Global Platts Analytics.

In the US, Hill indicated that gasoline market has already recovered to around 98% of pre-pandemic level in terms of sales. Also, latest TSA (Transportation Security Administration) report showed the air travel throughput at US airports in the last labor day holiday was only off 5% from pre-pandemic levels, according to Hill.

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Wildcard Iran

After lengthy nuclear talks and negotiations, Iranian barrels could return to international markets sometime in Q1 2022, possibly by February if a deal is reached, said Kang Wu, head of global demand and Asia analytics at Platts Analytics, during a panel discussion session at the APPEC.

South Korean, Chinese and Japanese petrochemical makers and refiners told Platts that the companies are excited about the potential resumption in Iranian oil trades next year as the Persian Gulf producer could provide an abundance of highly economical crude and condensate to Asia.

The Northeast Asian end-users, including South Korea's Hanwha Total and SK Innovation, China's Sinopec and Fuhaichuang, or formerly known as Dragon Aromatics, as well as Japan's ENEOS were some of the biggest customers of Iranian oil prior to the sanctions.

Although industry executives and analysts said OPEC+ would have adequate spare capacity to accommodate Iranian supply, the return of Iranian crude and condensate will likely set the stage for a new competition for the Asian demand pie, prompting major producers to make competitive offers in the market, according to refinery officials and trading sources in China, South Korea, Japan, Hong Kong and India.