Three bold predictions for the oil market in 2022

It seems like a fool's
errand to predict what might happen in the oil market in any given year.
No one foresaw that the global pandemic would cause oil demand to fall off a cliff in 2020, briefly sending oil prices into negative territory
.
Similarly, as the industry recovers from a brutal 2020, few would predict that oil prices will break above $
70 a barrel by 2021.

In short, any prediction of what might happen in the oil market seems bold
.
Despite the potential for mistakes, I think it's best to have an expectation of what is likely to happen in the oil market in the year ahead to help guide investment decisions
.
With that in mind, given the way things are going, I think the following three predictions
could happen in the oil market in 2022.

Oil prices will remain elevated, possibly above $100 a barrel

In recent years, the oil industry has undergone a structural shift
.
The company significantly reduced capital expenditures
for new oil projects.
European oil majors such as BP and Total Energies have shifted spending away from oil and gas to renewables
.
At the same time, major U.
S.
producers have shifted from focusing on expanding production to generating cash flow and returning it to shareholders
.
As a result of this shift in spending, the industry discovered the fewest barrels
of new oil and gas resources since World War II in 2021.

Despite the rebound in oil prices, most producers plan to limit capital spending
in 2022.
At best, many oil producers only plan modest production growth
in 2022.
At the same time, OPEC has maintained tight control
over supply despite soaring oil prices.

The oil market is likely to remain tight
as demand is expected to return to pre-pandemic levels later this year.
This should keep the price high
.
If the industry experiences a major supply disruption, this dynamic sets the stage
for a potential price spike.
From natural disasters in major oil-producing regions to terrorist attacks in major oil hubs, anything could cause prices to break above $
100 a barrel sometime this year.

Year of dividends

With oil producers tightly controlling capital expenditures, they are generating significant free cash flow
at current prices.
This gives them cash to shore up their balance sheets and return more money
to shareholders.

Producers are looking for innovative ways
to return capital to shareholders.
For example, Devon Energy (NYSE:DVN) launched the industry's first fixed-plus variable dividend framework
last year.
It has distributed approximately 50% of its excess cash to shareholders
through additional dividend payments each quarter.

Others followed suit
.
Pioneer Natural Resources (NYSE:PXD) has launched a similar framework, paying 75% of its free cash flow as
dividends.
Meanwhile, EOG Resources (NYSE:EOG) paid two sizable special dividends in 2021, and ConocoPhillips (NYSE:COP) launched a variable cash return plan
for 2022.

More oil companies are likely to launch similar cash-return strategies
in 2022.
Coupled with rising oil prices, this strategy shifts the groundwork
for the oil sector to pay a large dividend in 2022.

The midstream industry is going green

As oil producers shift from focusing on production growth to expanding cash flow, growth prospects for the midstream sector are increasingly dim
.
This has led to an increasing number of energy infrastructure companies exploring new sources of
growth.
Their best bet is to start going green
.

We have already seen some changes
in this direction.
Natural gas pipeline giant Kinder Morgan (NYSE:KMI) formed a new energy venture capital group
in 2021.
Its first investment was in the acquisition of a renewable natural gas producer with multiple facilities
under development.
Kinder Morgan is exploring other business opportunities, including investing in renewable energy projects
.
Energy Transfer (NYSE:ET) also announced last year that it was ramping up its efforts to focus on developing alternative energy projects
.

While the industry started smaller last year, I believe we will see midstream companies start putting a lot of money into alternative energy investments
in 2022.
Large players in the industry are likely to launch large projects to repurpose existing assets to handle alternative fuels and large-scale investment expansion into new infrastructure such as renewable energy generation assets, hydrogen production, carbon capture and storage, and electricity transmission
.

In addition, I think we will see more acquisitions
aimed at building a platform for future expansion.
This will help give investors more insight into the future growth of the sector, which could help bring the sector out of the
doldrums.

2022 could be another big year for oil stocks

The oil industry is notoriously unpredictable because oil prices are unpredictable
.
We have seen this
clearly over the past two years.
However, as things stand, crude oil prices look set to move higher
in 2022.
That should give oil producers cash
to pay huge dividends.

At the same time, as producers focus on generating and returning cash, this has forced the midstream industry to look elsewhere for growth, with going green as its only option
.
If I'm right, oil stocks could generate strong total returns
again in 2022.