A happy and healthy New Year to all of our readers from PVM. Between Christmas and the end of the year markets displayed the same attitude as throughout the whole of 2021. They reacted to economic developments that were shaped by the coronavirus – since the end of November by its latest variant, Omicron. Infection rates are on the rise globally, restrictions are being introduced in several countries, the air travel sector, amongst others, is suffering, yet investors’ optimism in tangible. It seems that the current strain produces less severe symptoms than its predecessors, which might just help us to struggle through the fourth wave of the pandemic with relative ease. Although risk assets were unable to make advances on the last day of the year equities made fresh record highs just after Christmas and oil also showed a healthy dose of confidence.
In a way, the performance of last week was a true reflection of 2021. Over the year equities and commodities produced stellar returns, partly because the baseline, the 2020 price levels were low, and partly due to central supports. Just look at the main stock indices. The MSCI Global Equity Index returned nearly 17% whilst the S&P 500 index gained 27% over the year. Commodities performed even better. The Refinitiv/CoreCommodity CRB Index rallied 39% last year but oil easily outperformed other raw materials. The two main crude oil futures contracts achieved positive returns of over 60% including monthly rollovers. The winner, however, was CME RBOB, which shot 77% higher year-on-year.
In a nutshell, 2021 demonstrated that the war against the coronavirus is a winnable one although the path to victory is paved with unexpected twists and turns. It also became obvious that without fiscal and monetary measures, which provided the global economy with invaluable support, last year’s results would not have been attainable. Oil also reaped the benefit of government and central bank actions and the market management of the OPEC+ producer group accelerated the march higher. Below we sum up the most important factors that shaped investors’ mindsets last year.
Geopolitics: there were two major issues that had to be followed and will likely be in focus this year. These are the Iranian nuclear negotiations and Cold War II. The potential Iranian comeback to the global crude oil export markets suffered a serious setback after the presidential elections in June. The lowest turnout of its electoral history saw the hardliner Ebrahim Raisi, former Chief Justice, to be declared the winner. It, therefore, will not come as a surprise the talks to revive the 2015 deal, which Donald Trump unilaterally withdrew the US from are painstakingly slow. An agreement is anything but a foregone conclusion, but it is worth keeping in mind that an eventual deal will probably see about 1 mbpd of Iranian crude oil flood the market.
The first year of Joe Biden in office was anything but uneventful on the foreign policy front. The US is fighting against both China and Russia to maintain its leading role as the guardian of global stability, both politically and economically. The introduction of the National Security Law in Hong Kong, the Chinese treatment of the Uyghur minority and its relationship with Taiwan have all increased tension between the two biggest economies of the world. The planned eastward expansion of NATO, Russia’s alleged intention to invade Ukraine and the resultant saga surrounding the launch of the Nord Stream 2 natural gas pipeline have had palpable consequences on global natural gas and oil prices.
Economy: global economic output increased throughout the year, almost exclusively due to unprecedented support from governments and central banks. This help came in the form of government loans to enterprises, low interest rates and bond-buying schemes to encourage lending. As aggregate demand started to rise consumer and producer prices also increased, to a great extent because of supply chain bottlenecks that created the “shortage of everything”. So acute this shortage has become that policymakers threw in towel in November and December in the fight against inflation. What was described as “transitory” during the first nine month of 2021 became “resilient” towards the end of it. Fiscal and monetary supports are now being withdrawn or at least scaled back in assorted attempts to tame galloping prices and cool off overheated economies.
Oil: our market faithfully followed equities in their upward trajectory and reacted positively to encouraging economic developments. The exceptional annual returns, however, would not have been possible without the disciplined and co-ordinated action of the producer alliance, OPEC and its ten peers. The group drew up a plan in April 2020 and has broadly stuck to it to ensure that global oil supply would consistently remain below consumption and bulging oil inventories that pushed the price of WTI into negative territory would gradually deplete. The numbers speak for themselves. OECD commercial oil stocks that were firmly above 3 billion bbls at the end of 2020 fell every single quarter of 2021 and bade farewell to 2021 almost 10% thinner. Global oil inventories drew anywhere between 850,000 bpd in 2021 (IEA) and 1.40 mbpd (OPEC). The net result was a staunchly backwardation of the two crude oil futures contracts, which, ostensibly, added a layer of price support for the better part of last year. In fact, so successful was the implementation of the output policy of OPEC+ that with WTI above $70/bbl and US retail gasoline prices well over $3/gallon the pressure from the US administration to increase production grew considerably on the group in the second half of the year.
The synopsis of last year could not be complete without mentioning climate change. The Texas freeze in February shut in more than 1 mbpd of US crude oil production in February and Hurricane Ida at the end of August had a similar impact. Growing number of wildfires and floods served us with a reminder that the rise in global temperature is a real threat, something that was expected to be addressed at the COP26 climate conference in Glasgow in November. Several initiatives were launched during the talks. Whether words, let it be about the reduction of methane emission, halting deforestation, or phasing out financing coal power projects, will be followed by actions remains to be seen.
And what does 2021 tell us about this year? What can we expect, where are the world’s economy and oil prices destined to head in 2022? We will have a look at the prospect of the New Year in tomorrow’s note.