Oil prices have moved higher over the past three months as demand has continued to recover toward pre-pandemic levels. OPEC+ remains disciplined in its approach to increasing oil supply and non-OPEC producers have been slow to respond due to shareholder pressures on capital allocation and ESG considerations. These dynamics have led to a tight physical market with inventories below five-year historical average levels, pushing crude oil prices up from under $70 per barrel in late August to the low $80 range in early November. Oil demand in 2022 looks set to match 2019 levels. While OPEC+ production should normalize, non-OPEC production growth will likely be slow to keep up with demand growth, leading to elevated prices over the next several quarters.
Middle Eastern oil exporters and Russia are likely to be the biggest winners in the new higher-price environment, but already tight bond spreads offer little upside for investors. Central Asian and African exporters of lower credit quality should benefit as sovereign fiscal balances and corporate balance sheets are fortified by higher prices. In Latin America, key exporters stand to benefit from higher prices; LatAm independent E&P credits should also benefit while most integrated national oil companies are likely tied to sovereign outcomes.
Asia, on the other hand, is dominated by net importers of oil. China only produces about 25% of the 15 MMBbl/d of crude oil that the country consumes and is the largest importer of crude oil in the world. India and South Korea are also among the top crude oil importers. These large countries will likely weather the impact of higher oil prices while benefitting from the growth that is driving oil demand higher. More vulnerable importers such as Turkey and Sri Lanka could face more significant risks from persistently high oil prices.
If prices remain at currently elevated levels, as we expect, there will be clear winners and losers in emerging markets. LatAm sovereigns such as Colombia, Mexico and Ecuador stand to benefit, as do African exporters such as Angola and Nigeria. While higher-profile importers such as China, South Korea, and India should weather growth-driven higher prices, more vulnerable importers such as Turkey and Sri Lanka will likely be more adversely impacted. Market headwinds have limited the impact of higher oil prices to this point, and idiosyncratic risks will continue to influence spreads, but coming quarters should reflect the differentiated impact of higher oil prices in emerging markets credit.