The rally seen this year in the oil markets, which included oil prices hitting a seven-year high last month, could be relatively short-lived.

Rising production from OPEC+ countries and the U.S. is set to increase global liquid fuels inventories and cause crude oil prices to fall in 2022, according to the U.S. Energy Information Administration (EIA). 

“We expect that the price of Brent will fall from an average of $84/bbl in October 2021 to $66/bbl in December 2022 and the price of WTI will fall from an average of $81/bbl in October 2021 to $62/bbl in December 2022,” the EIA wrote in a report on Nov. 18.

On Nov. 18, oil prices were hovering near six-week lows with Brent crude at $80.51/bbl and WTI in the U.S. at $78.43/bbl.

Still, spot prices of Brent and WTI have risen since their April 2020 lows to above pre-pandemic levels for most of 2021. In October, the price of Brent crude oil averaged $84/bbl, and the price of WTI averaged $81/bbl, the highest nominal prices since October 2014. 

EIA Graph of Monthly Crude Oil Spot Prices

“We forecast that global oil inventories will begin building in 2022, driven by rising production from OPEC+ countries and the United States and slowing growth in global oil demand,” the EIA wrote. “We expect this shift will put downward pressure on the Brent price, which will average $72/bbl during 2022.”

Similarly, the International Energy Agency also projects the oil market rally may ease as high prices could provide incentive to boost production, particularly in the U.S., according to a recent Reuters report.

The Reuters reports that the IEA expects average Brent prices to be around $79.40/bbl in 2022. However, Rosneft said it may reach $120/bbl in the second half of 2022, according to the report citing TASS news agency.

Since the third quarter, global consumption of crude oil and petroleum products has increased faster than production, which has caused lower inventory levels and higher crude oil prices.

“We forecast global crude oil demand will exceed global supply through the end of the year, contribute to some additional inventory draws, and keep the Brent crude oil price above $80/bbl through December 2021,” the EIA wrote.

However, the EIA forecasts that global oil inventories will begin building in 2022.

Low crude oil inventories, both globally and in the U.S., have put upward price pressure on near-dated crude oil contracts, whereas longer-dated crude oil contract prices are lower, likely reflecting expectations of a more balanced market, according to the EIA.

The futures markets are showing high prices for near-term contracts compared with longer-dated contracts, a situation known as backwardation. Crude oil inventory levels, among other factors, affect the difference between near-term and longer-term futures prices. Differences in prices between crude oil contracts for delivery in the near term compared with contracts for delivery at later dates indicate market expectations that inventory draws will moderate.

Low crude oil inventories in the U.S.—particularly in the transportation and storage hub of Cushing, Oklahoma, where Nymex WTI futures contracts are physically settled—have likely contributed to additional backwardation in WTI compared with Brent. According to the EIA’s Weekly Petroleum Status Report, crude oil inventories in Cushing were 26.6 million barrels on Nov. 12, which was 49% below the previous five-year average and 32% of the working storage capacity.