THE Covid-19 pandemic disrupted the supply and demand of oil and gas in 2020.

       On the demand side, due to the infectious nature of the Covid-19 virus, global economies went into lockdowns to curb the outbreak. Flights were grounded while households were quarantined in their homes, limiting physical interactions within communities.

       Looking at the Oxford Global Stringency Index, which compares countries’ policy responses to the coronavirus pandemic, the headline figure for most major economies surged to the above 70 level (the higher the figure, the stricter the policy), indicating the harshness of the containment policy in the wake of uncertainty.

       With the plunging demand for crude oil, Brent plummeted to as low as around the US$20 (RM83) per barrel level, while WTI dropped to the negative zone somewhere in April 2020. And both main indicators ended the year roughly 20% below the pre-pandemic level.

       Oil price rise

       But it was a different story for 2021. Oil prices surged sharply with Brent posting as much as a 50% gain while WTI advanced 55% by the end of 2021.

       In general, we can attribute crude oil’s bull run to the tight supply matched with the recovering oil demand, as global economic recovery gained momentum.

       Some major economies had an encouraging vaccination pace, which ultimately led to the early reopening of economies.

       By mid-July, at least 50% of the US population had already received full vaccination doses. Combined with pent-up demand, the economy was well under way towards a restart.

       In 2020, to manage the declining oil price, the Organisation of the Petroleum Exporting Countries plus allies (Opec+) had agreed to reduce output by 10 million barrels per day (bpd), about 10% of world output, from May 2020 to end-April 2022.

       But with global demand recovering and outlook projections seeming to be getting better, Saudi Arabia proposed that Opec raise production by two million bpd from August 2021 to December 2021, but extended the rest of the cuts until the end of 2022 without adjusting its baseline production.

       The UAE accepted the first part of the proposal but rejected the latter. Considering that Abu Dhabi has invested billions of dollars to increase its production capacity, the baseline set was deemed too low and it wanted the level to be raised.

       But the market heaved a sigh of relief when the members later announced they had reached an agreement to ease production cuts by 400,000 bpd each month, beginning in August 2021, with adjustments to the baseline production of some Opec+ countries.

       Output gap

       Given the projected demand of 96.4 million bpd in 2021, there could be an output gap this year, unless Opec countries agree on increasing output.

       We also need to include the decline in investment among oil producers that originated in the United States into the supply shortage factor, which could be a result of the transitioning towards green energy.

       Despite the higher crude oil prices in 2021, the capital expenditure among these companies has been muted.

       Although the decline of crude oil had started since 2019, oil price crashes due to the pandemic may have accelerated them.

       According to a report by the US Energy Information Administration, the ratio of capital expenditure to cash flow dropped to 41% in the third quarter of 2021, which marked the lowest on record since 1995, whereby historically, the ratio has always been greater than 100% due to the capital-intensive nature of the business.

       Other than that, oil prices hit a high for the first time since the pandemic started in February 2020 due to the winter storm.

       The freezing weather in regions across the US sparked another rally in energy prices, bolstering WTI crude to settle above US$60 (RM251)a barrel while Brent climbed 1.4% to US$63 (RM264) per barrel.

       Cold weather racked parts of the US and propelled more demand for power and fuel while simultaneously threatening to hinder production in Texas.

       Towards the later part of the year, the rise in oil prices was further fuelled by Hurricane Ida.

       It hit the Gulf of Mexico and caused around 90% disruption to the region’s crude oil production, while damaging current pipelines and structures. For the full-year average, Brent was traded around US$71 (RM297) per barrel, followed by WTI crude at US$68 (RM284) per barrel, which were 63% and 72% higher than in the year 2020.

       Going into 2022

       The recent political conflict between Ukraine and Russia has further roiled financial markets.

       Considering that Russia is the world’s second-biggest oil producer, behind only the US with Ukraine a key energy transit hub, where a large amount of Russian natural gas exports to Europe flow through, there are enough reasons for crude oil prices to be even more bullish following the development of the conflict.

       On Wednesday, combined with an issue relating to a key pipeline from Iraq into Turkey, Brent closed at US$89.50 (RM375) per barrel, the highest since October 2014.

       At its core, the ongoing pandemic outbreak is indeed a driver of global uncertainty, as Covid-19 can severely affect public health and the global economy.

       The discovery of Omicron in late 2021 has certainly renewed concerns among market players although data shows that Omicron does not pose a big threat on crude oil demand.

       Recent studies have suggested that the new variant causes only milder symptoms albeit being much more transmissible compared with its predecessors.

       Therefore, more countries have begun to accept the fact that people need to live with Covid-19 and scrap the costly pandemic restrictions.

       Having said that, we are projecting that crude oil will trade in the range of US$80 to US$90 (RM335 to RM377) per barrel throughout the first half of 2022.

       We reckon that it is unlikely that Russia will invade Ukraine, albeit the risk still being there, and the conflict will continue to be the main topic of international politics for quite some time before it dissipates.

       Combined with the mild Omicron variant and gradual rise in production levels in Opec+, we believe that the bullish trend in crude oil is still strong and very much alive.

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