When analysts realize that global oil (or energy) markets are still linked to geopolitics, new pressure on oil or energy prices is clear. Even that Eu
When analysts realize that global oil (or energy) markets are still linked to geopolitics, new pressure on oil or energy prices is clear. Even that European energy prices are already sky-high, more is to be expected the coming months. For crude oil, any real geopolitical crisis will push oil prices up. Fundamentals are heading for sweet spots, but investments will be leading. Political-military moves however could throw technical analysis and fundamentals in the dustbin, opening up scenarios in which $100 per barrel will be seen as very low.
Top Geopolitical Factors to push up Crude Oil and Natural Gas Prices 2022:
1. Russia – Ukraine:
Looking at the ongoing military buildup at the Russian borders with Ukraine, and the debilitating status of Russia’s economy and dwindling support for Vladimir Putin, a potential regional military crisis is looming. If US, EU or NATO are keeping to their current wait-and-see while diplomatically protesting strategy, Putin’s dream of recuperating the heartland of the former Russian Empire or FSU is coming closer. Without any doubt, Putin’s current chess play is at a much higher level than the NATO-USA-EU triangle is putting in place. For the Russian strategy, all regional military and economical factors are either on green or orange, no red lights at present able to stop a Russian move if really wanted. Putin’s weaponization of commodities, especially natural gas and crude oil to Europe, has pushed European governments almost to a surrender. Without any option to quell a commodity crisis, energy crunch or even military buildup, Putin’s regime holds the cards for 2022 in the European arena.
2. Iran JCPOA:
The ongoing JCPOA discussions in Vienna, Austria, between UK, Germany, France, Russia, China and Iran, as the USA is still on the sidelines, are heading for a major showdown the coming weeks. Anything else than a major breakthrough will be leading to an increased regional and global tension level, as Iran’s ongoing nuclear program is not far, or even already, at a point of no-return. The statements coming from Tehran that they have been able to increase nuclear processing to above 60% means that a nuclear weapon option is already in hand. A potential move to reach 90% or more is only needed for a hard-core nuclear weapon system, linked to the increased ballistic missile system capabilities of Iran, which has been shown the last days again. Any breakdown of the talks, which are only hanging on the political willingness of European parties not to give up, will lead to a direct and higher level of confrontation with the USA, Israel and most probably a long list of Arab states. Ongoing discussions on a military level are already reported between Israel, Saudi Arabia, UAE and others. A breakdown of the Vienna talks could lead within a short period of time to a full-scale Israeli military operation to remove the nuclear capabilities of Iran. The latter is possible, but the outcome or fall-out of such a move is still unclear. Without the military capabilities of the US or NATO, Israel will not be able to fully remove Iran’s threat. A potential answer of the Iranian IRGC in the maritime sphere (Arabian Gulf/Persian Gulf, Red Sea or elsewhere) is to be expected. At the same time, IRGC linked groups, such as Hezbollah, Hamas and Houthis, will take part in any 3rd party military reaction towards Israel and others.
3. Turkey financial economic crisis:
The ongoing financial crisis in Turkey, which has resulted in an immense devaluation of the Turkish Lira (TL) and a major inflation issue, is undermining not only the economic situation of the country but also holds a dire threat to the stability of the political and military system. Turkish president Erdogan and his AKP party is looking at a situation in which financial and economic factors are undermining the support for their political future. At the same time, Turkey is looking at an increased need for Foreign Direct Investment, as major investors are leaving the fledgling economy. The last months attempts have been made to find new sources of FDI, mainly from Qatar, UAE and China, but these will not be able to stem any further deterioration of the TL or government budgets. The course taken by Erdogan’s government, partly based on a perceived Islamic interpretation of financial and economic factors, is feared to lead soon to a possible overall meltdown. Internal instability and economic pressures could lead to a possible strategy in which new regional military adventures could be used to gain internal support again. Without any other options left, Erdogan could be facing a possible political crisis or maybe even a new political-military opposition strong enough to remove him from power. A full-scale crisis in NATO’s 2nd largest military player, close to the EU, is a threat not only to regional security but also to global maritime trade, as major commodity and trade routes are linked to Turkish influence areas.
4. USA – China:
The ongoing geopolitical power play between Washington and Beijing is heating up. The media has been mainly looking at naval maneuvers in the South China Sea or with regards to Taiwan. These military moves are only a sign of a growing Chinese belligerence and new strategy to project power beyond historical lines. China’s ongoing OBOR strategy, seen by mainstream analysts as a pure economic-financial phenomena, is increasingly linked to military-geopolitical strategies of the Chinese government. The outcome (or fall-out) of OBOR is underestimated, as main parts of the strategy are already showing a potential risk to Western (US-EU) interests in the Middle East, Mediterranean region and Africa. At the same time, Chinese influence in Europe or on major trade routes is growing exponentially, especially Beijing’s willingness to acquire or invest in European ports (Greece, Italy, Cyprus), MENA (Egypt Suez Canal, Israel, Turkey, Iran) or Africa. The total set-up could and will lead to potential confrontations which could lead to a military clash in 2022. US strategies have until now only be diplomatic or financial nature, but based on the growing threat scenarios could lead to a militarization soon.
5. China-Taiwan:
China’s current aggressive military strategy towards Taiwan, according to China a province belonging to the mainland, could lead to a much more aggressive military action or even a Chinese invasion of the island. Even that US and other NATO forces are showing their flag at present, Chinese military are perceived to be more than able to occupy the island quickly. A possible confrontation with Western forces, including South Korea, Japan and even Australia, is not unfeasible. Military confrontation in and around the South China Sea will for sure involve at the same time operations with the Philippines, Indonesia and Vietnam.
6. Libya:
Since the removal of former Libyan leader Muammar Ghadaffy, Libya has been involved in a major civil war. The last months, Libyan leaders and political parties have been attempting, under pressure of international community, UN and 3rd parties (Turkey, UAE, Egypt, Russia) to set up new elections for a new parliament and president. The last weeks however the country again has crawled back to high levels of instability, as elections have been postponed and power players are returning to their strongholds. A potential new civil war scenario is already expected very soon, as outside powers are also not yet willing to remove their own military operations. Turkey, Egypt, UAE and others are still vying for their own version of the new Libya, in which regional power politics have taken over internal Libyan players. Renewed military confrontation is a high possibility.
7. Iraq:
Iraq’s latest elections have not yet removed instability in the country at all. In stark contrast to Iraq’s Kurdish region, the power politics of the Sunni and Shia areas of the country are still destabilized. The unexpected strong reemergence of Muqtada Al Sadr has also put immense pressure on more liberal political groups. At the same time, Iran’s IRGC led power politics in the country are still very strong, even after the weeks long demonstrations during 2021. Due to the end of the US-led military operations in Iraq, stability and progress now totally rests with the still very weak Iraqi government, which not only has to cope with religious tensions, economic and financial crisis but also with the power politics of Al Sadr and the still strong Iranian influence on the horizon. In 2022 the danger exists that not only internal fighting will reemerge but Iran could be choosing to increase its influence and belligerence too.
8. Internal instability Saudi Arabia:
The future of Saudi Arabia, not only one of the leading forces in the Middle East or the Kingpin of OPEC+, is of the utmost importance to the future of the Greater Middle East. With its ongoing economic diversification programs, such as Saudi Vision 2030, the Kingdom is set to play a long-term role in the stability and progress of the Middle East. At the same time, the Kingdom is one of the major military powers in the region, undergoing after decades of just being a dumping ground for military hardware from the West, a military capabilities catch up game. With a vast new arsenal of military hardware, now linked to increased training and research & development, it starts to become a major regional power house. Still the future of the Kingdom is in the hands of a small group of Royals and influential power brokers. The coming year(s) the Kingdom is set to be changing from a formerly traditional royal power house to a new kind of player, all linked to the upcoming regional giant Saudi Crown Prince Mohammed bin Salman. The latter, at present by some seen as the “real king in hiding”, is still under the patronage of King Salman, his father. If in 2022, due to unforeseen circumstances, the Crown Prince will be asked to take over the helm of the Kingdom, possible instability could emerge. Even that MBS is the main power broker in the country, it should not be forgotten that changes of economic, social and financial power systems always lead to confrontation. Where there are winners (MBS), there are losers, which still will be waiting for a potential weakness. The first months of the reign of a new Saudi King are the most volatile and instable. No real opposition at present is showing its face in Riyadh, Jeddah or Khobar, but not a lot of analysts had foreseen the stellar rise of MBS too. The main support at present for MBS is Saudi youth, entrepreneurs and scholars. Possible major hiccups in the Saudi Vision 2030 -led economic diversification plans or dreams could still be an instrument of concern. Higher crude oil and gas prices ($75-85) would be however sufficient to keep dreams and progress in place.
9. OPEC+ fall-out:
One of the main unknowns in 2022 will be if the ongoing Bromance between OPEC, Russia and other non-OPEC producers will be going strong. The already unexpected long period of consolidation that the former frenemies have been able to put in place has been impressive. The cooperation between Saudi Arabia, UAE and Russia, or MBS-MBZ-Putin, was not foreseen by anyone. The willingness to forego their own strategic goals to stabilize global crude oil markets has changed the world. Without any real conflict, all parties involved have been able to keep in place a production and export strategy that has not only removed the immense oil glut of the years before 2020, but also has been material behind the stabilization of oil prices in general. The three leading parties have been able to forge a structure and framework workable for all, including more aggressive producers in Africa, Latin America or even inside of the Middle East. Potential conflicts between Saudi Arabia, UAE and Russia, have been smoothed over, without bringing the alliance to the brink. At the end of 2021 the pressure clearly has been increasing inside of the OPEC+ structures, as the UAE (Abu Dhabi) is looking for the option to produce more crude oil, while others also are looking to regain market-shares. Russia and Saudi Arabia however have until now been able to keep all inside of the agreement, partly due to the fact that some OPEC+ producers were not even able to produce their committed full volumes. Spare-production capacity of others was used to supply markets at that time. The year 2022 could however be a different situation. Possible higher calls on OPEC+, mainly on Abu Dhabi, Saudi Arabia and maybe Russia, could result in production pressures. The expected or noted spare-production capacity of some is under scrutiny, some even believe that OPEC+ is already producing to its max very soon. If the latter will become visible, a major shock to the current market is possible, pushing price levels for sure.
Another not-to-be-talked-about issue is what happens if OPEC+ will break up? A possible destabilization of the alliance, possibly resulting in a new individual production strategy for all, will be detrimental for price levels. A possible price or market share war could not only result in a new oil glut (short-term) but also will bring prices down for sure. The latter sounds maybe very good for consumers and industry, but ultimately will lead to again lower investments upstream, causing even higher shortages soon and price spikes very soon after.
Market Fundamentals?
In addition to geopolitics, market fundamentals for oil and gas are still in play too. The unexpected growth of demand for hydrocarbons is still underlying not only the role of conventionals but also has pushed several risk factors to the fore.
For 2022-2023 the main conventional drivers for hydrocarbons will be investment and demand. Since the beginning of the 2010s, investments in upstream oil and gas have been too low, driven by fear of the energy transition in the OECD countries, climate activism and major emphasis on ESG/SDG strategies by investors. The year 2022 is most probably going to be another one in which overall investments are not sufficient enough to counter growing demand overall while at the same time mitigating production decline factors at existing fields globally. Less investments, some are warning already for a major production slump until 2030 of around 30 million bpd would confront the global economy and consumers with higher energy and product prices. As is shown in Europe or Asia, energy prices have spiked, reaching historically high levels, which are not only hitting consumers directly (electricity-heat bills) but also via products, as costs of all products have increased. The dream of renewable energy proponents that costs would be going down also here has been wrong. Construction and production costs of solar and wind farms also are going up, due to higher energy costs worldwide.
For 2022 some relief could be expected, if markets are behaving normal. The extreme price spikes of the last months could be over, but overall crude oil and natural gas will be more expensive than the years before. If geopolitical risks at the same time will be interfering too, a possible $100 per barrel or more scenario is feasible. Consumer energy costs, especially electricity and natural gas, are looking at even larger fundamental risks, as major markets have been lax in their commitment to counter or mitigate renewable energy intermittency risks. 2022 will not be different from 2021, maybe even more volatile than before.
Will there be some downward price pressure factors in place?
In a normal scenario, pre-2020 based, possible downward options are very slim. Overall global economic growth is expected to counter possible price slumps very soon. Demand for goods, products and energy is not going to be down enough to counter upward spikes.
However, a possible former Black Swan is still in place. COVID-19, which ever Greek Alphabet is not important, is still having its fangs in global developments. The current Omicron variant has shown that even a milder virus variant can still cause havoc. A re-emerging stronger COVID virus would for sure bring prices back to below $70 per barrel (or its equivalent in natural gas). Instability in society and economies have increased but are still regarded to be temporary.
A major Black Swan is also hiding still, as the so-called quantitative easing (QE) measures of the US, UK and EU, could be ended soon. Taking out existing multi-trillion support programs in major economies could not only lead to higher bankruptcy levels, as in most markets companies will have to repay COVID-related financial support schemes, but they also could lead to increased pressure on equity and housing markets. Lower equity returns or pressure on house prices could be a trigger for a financial crisis still. Some economists have been warning already, but the global system, politicians and consumers, seem not to have realized yet that we have been living on borrowed time. Repaying debts will slash high profit margins or even bring companies down. Lower profits, margins and foreclosures will take also victims on stock exchanges, where a growing amount of people have been investing with “borrowed” cash.
The Year 2022 will be a potentially volatile year, if Black Swans and Geopolitical risks will come together to play. For investors and funds maybe nothing new, for consumers and politicians most probably a major shock. Whatever people think, society and the economy is not makeable, it is an animal with its own objectives and potential risks. Overall, crude oil and natural gas prices could be one of the only real winners again. After years of being shunted and abused, hydrocarbon sector players are back in the limelight. With prices already showing again some power to break the $80-85 price band, crude oil could easily be heading to unchartered territory again…$100 per barrel or more.
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