Let’s take a look at how oil markets fared this year and which issues proved to be the most important drivers of prices as 2021 draws to a close.
WTI began the year just below $50 per barrel, rose to a high of $83 per barrel, and then fell back into the low to mid-$70 per barrel range as the year came to a close. Brent followed the same path.
In 2021, the coronavirus pandemic remained the most pressing issue affecting energy markets. While lockdowns and movement restrictions dominated the news in 2020, the focus in 2021 shifted to the recovery of economies and, in particular, travel—at least until December.
The economic recovery has been uneven, with some industries recovering much faster than others. Despite the upward resuscitation and growth narrative, energy markets remained vulnerable to fear and panic, first as a result of COVID’s Delta variant, and then as a result of the Omicron strain. The news of the Omicron variant’s emergence coincided with the sudden drop in oil prices the day after Thanksgiving in the United States. This demonstrates that the markets are still volatile and susceptible to virus fears.
Inflation is the second factor.
This year’s inflation was aided by higher energy prices, but as I mentioned last week, energy prices were also influenced by inflation. As we get closer to the end of 2021, we can’t ignore the impact it’s having on keeping oil prices stable.
Despite fears of the Omicron variant and growing restrictions in Europe and parts of Asia, it has helped keep oil prices relatively stable. Inflation has hampered producers’ ability to increase output by increasing the costs of all aspects of the drilling and production process
Take a trip
In 2021, air travel bookings in the United States nearly reached pre-pandemic levels around the Thanksgiving holiday, which is traditionally the busiest travel period of the year.
Jet fuel deliveries in the United States increased from February to August in 2021, then fell slightly from August to November. The difference between 2021 and 2019 did, however, narrow to 10.8 percent in November.
Domestic and cargo flights have increased more than international flights. International travel is still a source of weakness, and it may have an impact on oil demand in 2022. In next week’s column, I’ll go over this in greater depth
The cost of gasoline
In the second half of 2021, gasoline prices in the United States were a major source of concern. In November, the national average for gasoline in the United States reached $3.42 per gallon, a 60 percent increase over the previous year.
The Biden administration’s attempt to lower prices with a coordinated Strategic Petroleum Reserve release did not produce the desired results, but fear of the Omicron variant did help to lower prices.
Nonetheless, as the year draws to a close, gasoline prices in the United States remain higher than most consumers are comfortable with, given the current economic climate.
In 2021, OPEC+ was a major driver of oil market news, as it worked to gradually increase production to meet rising demand. When a rift developed between Saudi Arabia and the UAE over how quickly production should be increased in July, there was some concern that the group would collapse.
However, after lengthy negotiations, a long-term agreement was reached to increase monthly production by 400,000 bpd. The market has continued to act as if a new agreement must be considered monthly because the group also agreed to meet every month to review and re-authorize the plan. As a result, around the beginning of the month, when the OPEC+ meetings are scheduled, prices tend to become volatile.
Oil production in the United States
The big issue with production in 2020 was that there was too much of it, and producers had to cut back before storage capacity became overburdened. According to the EIA, oil production in the United States decreased by 8% in 2020, the largest annual drop on record.
The big news in 2021 was that, contrary to expectations, US production did not increase to meet increased demand. Rather than returning to the “growth at all costs” model of the past, US oil producers reduced their budgets and used the extra revenue to pay down debt and return value to shareholders as oil prices rose.
Despite the significant increase in oil prices, US oil production began 2021 at 11 million barrels per day and ended the year at around 11.6 million barrels per day.
Next week, we’ll look at what production in the United States might look like in 2022.