Oil market rebalancing remains fragile as measures to contain the spread of COVID-19, with its more contagious variants, weigh heavily on near-term recovery of global oil demand, but new support is provided by a more positive economic outlook for second-half 2021, along with a pledge from OPEC and its allies (OPEC+) to hasten the drawdown of surplus oil inventories, the International Energy Agency (IEA) noted in its February Oil Market Report.
Global oil demand
IEA forecasts world oil demand to grow by 5.4 million b/d in 2021 to reach 96.4 million b/d, recovering around 60% of the volume lost to the pandemic in 2020.
While oil demand is expected to fall by 1 million b/d in first-quarter 2021 from already low fourth-quarter 2020 levels, a more favorable economic outlook underpins stronger demand in second-half 2021. The incorporation of new data lowered the 2019 baseline by 330,000 b/d.
In its January update, the International Monetary Fund (IMF) raised the global GDP growth forecast for 2021 to 5.5% from 5.2% as the robust recovery in manufacturing activity and stronger growth expectations for the US offset near-term weakness.
Meantime, IEA revised down its global demand estimate for 2021 by 200,000 b/d, to 96.4 million b/d, following adjustments to historical data, but growth remains largely unchanged at 5.4 million b/d year-on-year. The forecasts for economic and oil demand growth are highly dependent on progress in distributing and administering vaccines, and the easing of travel restrictions in the world’s major economies.
Global oil supply
Global oil supply rose 590,000 b/d in January, to 93.6 million b/d, as OPEC+ cuts eased and non-OPEC+ pumped more. In February, global output is set to fall as Saudi Arabia implements a sizeable voluntary cut. The outlook is improving for countries outside the OPEC+ alliance, with an 830,000 b/d gain expected in 2021 versus a 2020 loss of 1.3 million b/d.
“Amid the uncertain outlook for oil demand, OPEC+ has reiterated its readiness to help eliminate the massive oil stock overhang that built up last year. Inventories have been steadily declining since 2020 third quarter but end-December OECD stocks were still 140 million bbl above their 5-year average. The current production policy of the group calls for most members to hold supply steady through March, while Saudi Arabia has promised to cut an extra 1 million b/d this month and next.” IEA said.
Outside of the OPEC+ group, producers are responding to higher prices, albeit cautiously and from a low level. Led by the Permian basin, US drilling and completion rates have risen steadily in recent months. While investor guidance published to date suggests operators will stick to financial discipline and reward shareholders in 2021, at current prices there is clearly potential for some producers to respect those engagements and modestly increase their capital expenditures.
“For now, though, we expect US crude oil supply to hold broadly steady in 2021 at around 11.2 million b/d after falling by 940,000 b/d in 2020. Canada, now pumping at record rates, has restored nearly all the volumes shut in at the height of last year’s demand collapse. Total non-OPEC+ supply will rise by 830,000 b/d in 2021 versus an annual decline of 1.3 million b/d in 2020,” IEA said.
With demand forecast to rise strongly and still modest growth in non-OPEC supply expected, a rapid stock draw is anticipated during the second half of the year. That sets the stage for OPEC+ to start unwinding cuts even if producers outside the group ramp up faster than currently projected.
Refinery, OECD stocks
Refinery throughputs declined by a modest 110,000 b/d in December. The first-quarter 2021 runs are expected to fall by 1.8 million b/d y-o-y, but annual growth is set to resume from the second quarter onwards. Most of the gains will come from the Atlantic Basin, where refinery activity is recovering from a lower base. In 2020, the Atlantic Basin refinery intake fell to 38.7 million b/d, the lowest in IEA records, which started in 1971.
Global implied stock draws accelerated from 1.56 million b/d in third-quarter 2020 to 2.24 million b/d in fourth-quarter 2020. In December, OECD industry stocks fell for the fifth consecutive month. A monthly decline of 44.6 million bbl (1.44 million b/d) left inventories at 3,063 million bbl, 138.3 million bbl above their 5-year average. Products led the fall. OECD crude stocks were 62.8 million bbl below the May 2020 peak. January data show continued declines.
Prices
ICE Brent crude futures rose above $60/bbl in early February and the 12-month backwardation breached $4/bbl, returning prices to pre-pandemic levels. Paper markets drove prices higher, reflecting a favorable overall economic outlook for second-half 2021 and OPEC+ supply cuts. Physical markets have lagged futures as differentials reflect some delays in clearing cargoes.
