There was no New Year hangover for the oil market as it kicked off 2022 in bullish fashion. A week in which supply side considerations took centre stage saw OPEC+ give the greenlight to a planned 400,000 bpd oil production increase in February. The widely expected decision is seen as a vote of confidence in the near-term demand outlook despite the rapid spread of the Omicron variant of Covid-19. Cases are surging faster than ever with record infections in the US, UK and France yet demand is holding up well thanks to the absence of harsh mobility curbs. The Omicron factor is still present, and will persist for a while yet, but is gradually losing influence.

Another prominent theme last week was tightening supplies from Libya. The North African producer’s oil woes deepened as maintenance work on a pipeline shut down 200,000 bpd output. This latest setback sent production tumbling to 729,000 bpd. To compare, the OPEC member produced 1.14 mbpd of crude oil in November 2021. The country’s volatile security situation means that a good chunk of output will likely remain shut-in over the coming weeks.

All the while, unrest struck in oil-rich Kazakhstan. Protests erupted following a fuel price increase. Clashes between troops and protesters soon turned deadly as the government blamed the unrest on foreign-trained terrorists. Russian “peacekeepers” were called in to quell the unrest, adding a further layer of geopolitical unease. As for the country’s oil production, key Kazakh oil fields continued to pump despite protests situation. That being said, oil production at Kazakhstan’s largest 700,000 bpd capacity oil field Tengiz was decreased by its operator. Production at the field is now being restored gradually. Looking ahead, further supply disruptions are unlikely after Kazakh President Kassym-Jomart Tokayev said on Friday that constitutional order had mostly been restored.

If anything, last week highlighted the fragility of crude supply. This helped drive the price action higher. The two major crude oil benchmarks gained 5% in the first week of the year and broke above $80 on Friday. As a result, both Brent and WTI have fully recovered from the end-November sell-off. Meanwhile, in a further encouraging sign, rising prompt spreads point to a tightening market.

Yet last week’s bullish showing was not without its share of red flags. For starters, the world’s top oil exporter, Saudi Arabia, cut the official selling price for all grades of crude it sells to Asia in February by at least $1 a barrel. This suggests that the world’s top oil exporter expects somewhat weaker demand in the key Asia region. Secondly, Friday’s US jobs report showed hiring slowed last month. Payrolls rose by 199,000 jobs in December, the second month of weaker than expected gains, as employers grapple with the effects of Covid. That said, the jobless rate dropped sharply to 3.9% from 4.2% in November.  Bets are therefore still on for a March rate rise. And lastly, the heightened price environment means that conditions are ripe for non-OPEC+ to boost output and rake in the cash.

Market players remain of the view that as global supply continues to increase in the coming months and demand growth normalises, oil prices will come under downward pressure. In the meantime, there is no getting away from the air of positivity sweeping through the energy complex. Speculators and portfolio managers now appear more bullish on oil prices. The latest positioning data shows that financial managers bought the equivalent of 19 million bbls in the ICE Brent contract in the latest reporting period to January 4. Total holdings now stand at a six-week high of 207 million bbls.  Speculators not only opened new longs, but they also closed shorts from the previous weeks. Gross longs were up by 13 million bbls while shorts positions were cut by 7 million bbls. Overall, combined net long in Brent and WTI contracts jumped to 478 million bbls, equivalent to around $35 billion.

Clearly, the oil market has fully recovered from the November omicron scare. However, the latest rebound in speculative buying could come to a screeching halt at any time. History has taught us market sentiment is fickle. Furthermore, the oil market is undergoing a bearish shift in fundamentals. A supply surplus is taking hold and is expected to widen in the run-up to peak summer demand in June. Speculators could therefore decide to take profit at any moment thereby prompting a reversal in prices. In short, despite the encouraging start, volatility on oil markets is likely to remain high in near-term as the speculative community continues to run the show.