Will oil prices soar or plummet in 2022? Be wary of U.S. shale oil disrupting the market

Even in the best-case scenario, oil prices are difficult to predict, let alone as the pandemic continues to put consumer plans on hold, government policies are slowly disintegrating the current global energy system, and businesses are in a fog of uncertainty
.

But one price level provides clues: $72.
4/b
.
The International Monetary Fund estimates that this is the price
Saudi Arabia needs to balance its budget in 2022.

As the "big brother" of OPEC's 13 members, Saudi Arabia has considerable influence
over oil prices.
Since negative oil prices in April 2020, OPEC+ has banded together to absorb excess inventories
in the global energy system by cutting production.
In addition, Russia's break-even price in 2021 is $69/barrel
.
Domestic fiscal needs in Saudi Arabia and Russia may determine the direction
of global oil prices in 2022.

Ellen Wald, a researcher at the Canadian Global Affairs Institute and author of "Saudi Inc.
," said break-even was just one consideration for Saudi Arabia
.
While the world's largest oil exporter relies heavily on crude oil revenues to maintain social stability, it is not keen on pushing prices up to levels that would unnerve its Asian customers and spur demand
for alternative energy sources.

Wald said in an interview that the Saudis would be satisfied with oil prices in the $65-75 range, although (the lower bound maybe) technically below their break-even level
.
She also noted that Aramco's oil production costs are among the
lowest in the world.

On the question of whether the Saudi-Russian friendship alliance will continue in 2022, Wald said:

"The Saudi-Russian partnership has been seen as the norm for Russian behavior, but in reality it is an exception
.
Russia finds cooperation very valuable for them, but only on the basis of Russian interests
.
”

However, Russian President Vladimir Putin may not have enough space to fight on the other front, as Russia battles Europe over gas and escalating
tensions with the United States over Ukraine.
What's more, if Russia increases production, the previously rising oil prices may fall back
.

Capacity shortages could push oil prices higher

Other producers are also wary of raising production, with most analysts expecting Brent to average in the range of $60-$79/b by the end of 2022
.
According to the median forecast of analysts from foreign media surveys, the average price of WTI crude oil may be around
$67 by 2022.

But JPMorgan's forecast is $80, and the investment bank expects oil prices to briefly exceed $125/b next year and more than $150/b in 2023 due to production shortages
caused by OPEC+ capacity.

Higher oil prices will also be positive for energy stocks
.
Investment bank Peters & Co.
estimates that PetroCanada will pay a record $32 billion to shareholders in 2022
.
Oil and gas producers will pay $9.
5 billion in dividends and $9.
6 billion in share buybacks, while infrastructure producers such as Enbridge Inc.
and TC Energy Corp.
will pay a total of $12.
9 billion in dividends and share buybacks
.

However, Canada and other oil producers are focusing on raising dividends and share buybacks rather than raising production, which could stimulate oil prices
.

The International Energy Agency (IEA) estimates that Canada, the United States and Brazil will reach their production caps in 2022, with the three countries adding 1.
4 million barrels per day, with the United States accounting for nearly three-quarters
of that.
In its December report, the IEA stated:

"If the remaining OPEC+ production cuts are completely lifted, Saudi Arabia and Russia could also set production records
.
"

Theoretically, this would add 6.
4 million b/d of production to the market, but if Russia's agreement with Saudi Arabia remains unchanged, it cannot add that much crude supply to the market
.
OPEC+ is widely expected to limit production, which could lead to a spike in prices, especially if the novel coronavirus and its variants are wiped out
in 2022.

Henning Gloystein, an analyst at Eurasia Group, said in a note:

"With little new capacity expected inside and outside OPEC in 2022, the global oil market could tighten
significantly once consumption finally recovers from the pandemic.
Given that growing climate concerns are making it harder to find investment in future oil projects, it is likely that oil prices will rise for some time after the pandemic, even during the green transition, as was already the
case in the coal industry in 2021.
”

One petroleum product worth paying attention to is jet fuel
.
Demand for other petroleum products has exceeded or approached pre-pandemic levels, but demand for jet fuel and kerosene has yet to recover, averaging only about 5.
17 million b/d in 2021, compared to 7.
9 million b/d
in pre-pandemic 2019.
The IEA expects jet fuel demand to reach 6.
2 million barrels per day by 2022, still well below pre-pandemic levels, but the travel boom could change the market landscape
.

Downside risks: Will the U.
S.
shale industry ramp up production?

Wald believes rising labor and raw material costs could hamper the prosperity of oil producers, especially in cost-sensitive U.
S.
industries
.
She said:

"Inflation will limit the growth
of the U.
S.
shale industry in 2022.
"

With many vulnerable emerging economies still affected by the pandemic, rising inflation could also dampen energy demand
.
The Fed may decide to raise interest rates to curb inflation, which will strengthen the dollar against emerging market currencies and reduce
the purchasing power of emerging market currencies.

The return of Iranian oil and possible Western sanctions against Russia could also be market disruptors if there is a breakthrough in the Iranian nuclear negotiations, but there is another key uncertainty that the US shale gas industry will be hit
hard in 2022.

Over the past few years, freewheeling, overleveraged producers from North Dakota, Texas and Pennsylvania have become the world's "swing producers," producing record highs
whenever oil prices may break the $60 to $70 mark.

However, the collapse in oil prices in 2020 has severely damaged U.
S.
industry
.
The U.
S.
Department of Energy expects U.
S.
domestic oil production to average about 11.
85 million b/d by 2022, down from a peak
of 12.
29 million b/d in 2019.
In its December report, the U.
S.
Department of Energy stated:

"For the full year 2022, we expect OPEC+, the US and other non-OPEC countries to see production growth outpace the slow growth in global oil consumption, especially given concerns about
the coronavirus variant.
We expect Brent crude oil prices to remain near current levels through 2022, averaging $70/b
.
”

But Sanford Bernstein & Co.
LLC analyst Bob Brackett believes U.
S.
shale producers still have the potential to undermine OPEC+'s carefully crafted plans
.
Blankett said in a report:

"If shale oil production skyrockets and the United States regains its position as the largest producer, oil prices could fall to around
$60/barrel.
"