IEA: Ongoing energy crisis boosts oil demand

Oct. 25, 2021

The ongoing energy crisis has prompted a switch to oil that could boost demand by 500,000 b/d compared with normal conditions, according to the International Energy Agency (IEA)’s October Oil Market Report. This contributed to an upward revision to IEA’s 2021 and 2022 forecast, by 170,000 b/d and 210,000 b/d, respectively. Global oil demand is now forecast to rise by 5.5 million b/d in 2021 and 3.3 million b/d in 2022 when it reaches 99.6 million b/d, slightly above pre-COVID levels.

“Oil prices are scaling multi-year highs as a shortage of natural gas, LNG, and coal boosts demand for oil, which could keep the market in deficit through at least the end of the year,” IEA said.

“The surge in prices has swept through the entire global energy chain, fueled by robust economic growth as the world emerges from the pandemic. Record coal and gas prices as well as rolling blackouts are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming. The higher energy prices are also adding to inflationary pressures that, along with power outages, could lead to lower industrial activity and a slowdown in the economic recovery,” it continued.

“For now, a reduction in the number of new COVID cases and rising mobility are lending support to oil demand. Global gasoline demand is currently running 2% below pre-COVID levels compared with a deficit of more than 10% at the start of the year. Air-travel is lagging further behind. All in all, world oil demand is forecast to rise by 5.5 million b/d, to 96.3 million b/d in 2021 and 3.3 million b/d in 2022, when it is set to reach pre-COVID levels.”

World oil supply, meanwhile, is projected to rise sharply in October as US output bounces back from Hurricane Ida and OPEC+ continues to unwind cuts. Earlier this month the producer group reconfirmed its agreement to boost output by 400,000 b/d for November, despite calls from major consuming countries for a more substantial increase to stall the decline in global oil inventories and the rise in prices.

“With OPEC+ currently on track to pump 700,000 b/d below the call for its crude during 2021 fourth quarter, inventories will continue to decline. As the bloc ramps up production, its spare capacity will dwindle. Compared with a cushion of 9 million b/d in 2021 first quarter, effective spare capacity could fall below 4 million b/d by 2022 second quarter and be concentrated in only a few Middle Eastern countries, although supply is expected to exceed demand. Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road,” IEA said.

Global refinery activity in third-quarter 2021 continued to disappoint, with lower throughputs in China and India in August only partially offset by a stronger performance in OECD Asia and Europe. Implied third quarter refined product balances show the largest draw in 8 years, which explains the strong increase in refinery margins in September despite significantly higher crude prices.

OECD total industry stocks drew by 28 million bbl in August to 2,824 million bbl, 162 million bbl below pre-COVID 5-year average. Preliminary September data for the US, Europe, and Japan show on-land industry stocks fell by a further 23 million bbl. Crude oil held in floating storage decreased by 8.5 million bbl to 98 million bbl in August. Preliminary data shows OECD industry stocks fell 23 million bbl in September to stand 210 million bbl below their 5-year average and at their lowest level since March 2015.

Meanwhile, the IEA’s World Energy Outlook 2021 highlights that the world is not investing enough to meet its future energy needs.

“Transition-related spending is gradually picking up but remains far short of what is required to meet the rising demand for energy services in a sustainable way. At the same time, the amount being spent on oil appears to be geared towards a world of stagnant or falling demand. A surge in spending on clean energy transitions provides the way forward, but this needs to happen quickly, or global energy markets will face a bumpy road ahead,” it said.