The supply front has been garnering all the attention of late. And it’s not hard to see why. Whether it be frigid weather in western Canada and northern US states or political unrest in Libya and Kazakhstan, the flurry of outages has provided ample ammunition for oil bulls. It was the same story yesterday. No sooner had Libya restarted output at four shuttered oil fields, including the largest 300,000 bpd El Sharara, its NOC suspended oil exports from the Es Sider terminal. The reasons cited were bad weather and lack of storage capacity.

At the same time, pandemic-spurred demand fears continued to fade amid expectations that the impact of Omicron will be limited. This sentiment was echoed by Jerome Powell. At his confirmation hearing, the Fed Chair said that he expects the economic impact of Omicron to be short-lived. Moreover, he pledged to prevent higher inflation from becoming entrenched. Such hawkish hints are consistent with a March rate hike, yet oil and stocks markets were undaunted. Attention will now turn to today’s US inflation report which is likely to show consumer prices hit a new 38-year high in December.

Oil was also bid up by the release of the EIA’s updated oil forecasts. The agency lowered oil output growth estimates for this year while raising demand projections. US crude supply is now expected to rise 640,000 bpd in 2022 to average 11.85 mbpd, lower than last month’s forecast of a 670,000 bpd and below the annual record of 12.3 mbpd set in 2019. Meanwhile, global oil demand is seen increasing by 3.62 mbpd this year, reaching 100.5 mbpd which is above the pre-pandemic 2019 level and a new record high.

Yet it was not all good news. The agency painted a less than encouraging picture for the oil balance. It expects global oil inventories to rise by an average 500,000 bpd in 2022, after decreasing by an average 1.4 mbpd in 2021. Even so, despite this bearish shift in oil fundamentals, the EIA still forecasts Brent prices will average a healthy $75/bbl in 2022.

Returning to the here and now, US crude and product inventories continue to head in opposing directions. API data released overnight showed crude stocks extended their recent run of declines last week with a smaller-than-expected drop of 1.1 million bbls. This puts stocks dangerously close to a three-year low reached back in September. In contrast, gasoline stocks surged by a whopping 10.9 million bbls and distillate fuel stockpiles increased by 3 million bbls.

Sliding breakevens

It may still be early days, but 2022 has got the makings of a great year for OPEC+. Oil prices are holding above $80/bbl even as the producer alliance continues with monthly supply increases. All the while, the breakeven oil prices that Middle Eastern countries need to balance their state budgets are projected to fall this year, according to the International Monetary Fund.

The lowest breakeven among OPEC’s Gulf producers is the UAE with an estimate of $60.40/bbl in 2022, down from $64.60/bbl in 2021. Kuwait comes next with an estimated 2022 breakeven of $64.50/bbl, more than $6/bblbelow the 2021 figure. Saudi Arabia’s fiscal breakeven price is expected to drop to $65.70/bbl this year from $76.20/bbl in 2021, according to IMF estimates. The price has been steadily falling since 2018, when it was $88.60/bbl. Meanwhile, the fiscal breakeven for Iraq, OPEC’s second-largest producer, is set to fall to $66.10/bblthis year from $71.30/bbl in 2021.

The latest oil price rally is easing pressure on Gulf exporters’ finances – but others are still long way off from balancing books. A case in point is Iran. Tehran’s fiscal breakeven price for this year is estimated by the IMF to be more than $295/bbl. In other words, Iran still needs the current price to be more than three times higher. Beyond OPEC, its non-OPEC allies are also enjoying a drop in breakevens. Azerbaijan’s fiscal breakeven price will fall to $66.40/bbl this year from $82.50/bbl in 2021. Kazakhstan’s fiscal breakeven is forecast to reach $73.10/bbl in 2022 while the equivalent figure for Oman stands at $61.80/bbl. In the case of Russia, the second-largest oil producer within OPEC+, it just needs prices to remain above $44/bbl to hit its fiscal breakeven.

Forecasting oil prices is fraught with difficulty, but the current thinking is that they will hold above $70/bblthroughout 2022 with the potential to spike in the latter half of the year. Should this prove to be prescient, the bulk of OPEC+ producers will be able to balance the books for the first time in several years. The trend of easing fiscal breakeven prices means that OPEC+ economies will emerge from this year in a stronger financial position. What’s more, there is the added benefit of cementing production policy. The declining fiscal breakeven prices for the likes of Saudi Arabia and the UAE will draw them closer to Russia. This, in turn, ought to encourage greater cohesion on production strategy beyond the current output pact which is set to end in April. Stronger partnerships and replenished coffers – that’s what OPEC+ can look forward to in 2022.