• Brent crude oil prices remain above US$80/bbl for now as supply outages in Libya and elsewhere offset any demand fears from Omicron spread
  • Omicron outbreak so far looks less deadly, unlikely to derail oil demand recovery in 2022; big risk is if China pulls down its shutters to contain the spread
  • For now, we maintain our average Brent crude oil price forecasts for 2022/2023 at US$75-80/bbl and US$85-90/bbl respectively
  • Oil proxies have underperformed the oil price recovery in 2021 and valuations look attractive; our top picks are CNOOC and PTTEP

Omicron variant not a big threat to 2022 oil demand recovery thesis yet. December 2021 was a volatile month for oil markets, with Brent slipping below US$70/bbl with the emergence of the Omicron variant but has since recovered almost all the losses and started 2022 on a solid note. Despite an exponential rise in the number of infections worldwide due to Omicron, hospitalisations and fatalities look to be on the lower side in this wave and hence, risk of further containment measures affecting oil demand seem to be low at this point. The only risk is China’s zero-COVID tolerance and Beijing’s response to the increase in cases, especially ahead of the Winter Olympics. 

We continue to expect even higher oil prices in 2023. While oil demand in 2022 recovers at above trend pace towards pre-COVID levels, 2022 should still represent a reasonably balanced market, as OPEC+ has surplus capacity. But, looking further ahead, we believe  oil price could spike up again above US$80/bbl in late 2022 and beyond, as severe systemic underinvestment on the upstream side in recent years could have an impact on non-OPEC supply growth. 

Oil proxies in favour, and potential capex revival could rejuvenate oil services. Having underperformed the oil price recovery in 2021, CNOOC and PTTEP remain our top oil proxies to buy. In addition, the Chinese oil majors offer high dividend yields of 8-12%.

We would also keep a close watch for signs of emerging green shoots for the downstream oil services sectors.