Oil’s sharp rally to near $70/bbl has spurred talk of a new super-cycle and a looming supply shortfall. However, the International Energy Agency (IEA)’s data and analysis suggest otherwise.
“The prospect of stronger demand and continued OPEC+ production restraint point to a sharp decline in inventories during the second half of the year. For now, however, there is more than enough oil in tanks and under the ground to keep global oil markets adequately supplied,” IEA said.
According to IEA’s latest Oil Market Report, oil inventories still look ample compared with historical levels despite a steady decline from a massive overhang that piled up during second-quarter 2020. By the end of January, OECD industry stocks, at 3,023 million bbl, were still 110 million bbl higher than a year ago at the onset of the COVID-19 crisis.
On top of the stock cushion, a hefty amount of spare production capacity has built up because of OPEC+ supply curbs. The group agreed a record 9.7 million b/d output cut last year and is still withholding roughly 8 million b/d from the market. In February, OPEC’s spare capacity (excluding Iran) stood at 7.7 million b/d, with much of it in the Middle East. Non-OPEC countries taking part in the deal hold an additional 1.6 million b/d that could be brought on to the market in short order.
For now, OPEC+ continues to restrict supply. Lofty stock levels and a still fragile recovery in oil demand led the group to agree on Mar. 4 to broadly extend cuts by one month into April. Saudi Arabia also rolled over its extra 1 million b/d cut and said it would gradually phase it out at the right time. The OPEC+ decision helped boost crude to its highest since May 2019, with Brent near $70/bbl and WTI at around $65/bbl. OPEC+ is to meet on Apr. 1 to chart policy for May.
Meantime, producers not taking part in the deal will see output rise by 700,000 b/d in 2021 after a decline of 1.3 million b/d in 2020. US production, hit hard by freezing temperatures in February, is expected to decline by 180,000 b/d in 2021, despite a gradual improvement in activity from last year’s slump.
As for demand, “a return to growth lies ahead,” IEA noted. Global oil demand was stronger than expected at the start of the year, boosted by colder weather and improved industrial activity in the US and elsewhere. Demand is set to rise by 5.3 million b/d from first-quarter 2021 to fourth-quarter 2021, as the economic recovery and vaccine programs gather pace and containment measures ease. For 2021, global oil demand is forecast to grow by 5.5 million b/d to 96.5 million b/d, recovering around 60% of the volume lost in 2020. Oil demand will return to 2019 levels by 2023, according to IEA.
Global refinery throughput rose 440,000 b/d in January but was 5 million b/d lower year-on-year. Arctic weather in the US caused a 1.9 million b/d m-o-m decline in February throughput and a 1 million b/d downward revision to the global first-quarter 2021 estimate. Chinese refinery runs were 2.2 million b/d higher than a year ago in January-February and are estimated to have reached a new record high of 14.3 million b/d in February. Global throughput is set to resume growth from second-quarter 2021.
OECD industry stocks fell for the sixth consecutive month in January. A monthly decline of 14.2 million bbl left inventories at 3,023 million bbl, 63.2 million bbl above their 2016-2020 average. Crude oil stocks led the fall with a counter-seasonal 23.7 million bbl draw. February data for the US, Europe, and Japan show that total industry stocks fell by 52.6 million bbl (1.88 million b/d) in total, led by lower gasoline and middle distillate stocks in the US.