Upward revisions to demand estimates and a slightly lower outlook for global oil supply have tightened expected balances for 2022, but still show a first-quarter 2022 surplus, the International Energy Agency (IEA) noted in its January Oil Market Report.
Robust demand, unscheduled supply outages and strong stock draws in December pushed benchmark oil prices to 7-year highs. Brent recently traded around $87/bbl and WTI at $85/bbl, up nearly $20/bbl from December lows.
While Omicron cases surge worldwide, oil demand defied expectations in fourth-quarter 2021, rising by 1.1 million b/d to 99 million b/d, according to IEA.
“Two years after first shaking markets, COVID-19 is once again causing record infections. But this time around, the surge is having a more muted impact on oil use. Indeed, mobility indicators remain robust and oil demand has been stronger than expected in recent months,” IEA said.
As a result, IEA has revised up its 2021-2022 demand estimates by 200,000 b/d. World oil demand is now seen rising by 5.5 million b/d in 2021 and by 3.3 million b/d in 2022, returning to its pre-COVID levels of 99.7 million b/d. However, IEA noted that in first-quarter 2022, demand is set for a seasonal decline, exacerbated by increased teleworking, and reduced air travel.
As for supply, disruptions and production shortfalls by some OPEC+ members are tempering growth expectations for 2022. In December, world oil supply rose by a modest 130,000 b/d to 98.6 million b/d, as outages in Libya and Ecuador and a smaller than scheduled increase from OPEC+ wiped out much of the expected growth. Producers taking part in the output deal delivered gains of 250,000 b/d, well below the allocated amount, and were 790,000 b/d lower than the group’s target. This shortfall was mostly due to under-production in Nigeria, Angola, and Malaysia, all faced with technical and operational issues. Russia pumped below its quota for the first time since record cuts were enforced.
“Even so, world oil supply is forecast to grow sharply this year, with the US, Canada and Brazil set to pump at their highest ever annual levels. US oil output is forecast to rise by 1 million b/d on average, to 17.7 million b/d, as operators respond to higher prices by putting more rigs to work. Additionally, Ecuador, Libya and Nigeria are already ramping back up. Finally, Saudi Arabia and Russia could set records if remaining OPEC+ cuts are fully unwound. In this case, global supply would soar by 6.2 million b/d on average in 2022 compared with a 1.5 million b/d rise in 2021,” IEA said.
While the steady rise in supply could see a significant surplus materialize in first-quarter 2022 and beyond, available data suggest 2022 is starting off with global oil inventories well below pre-pandemic levels.
“A growing discrepancy between observed and calculated stock changes suggests demand could be higher or supply lower than reported or assumed. Moreover, higher output would also result in lower OPEC+ spare capacity. By the second half of the year, effective spare capacity (excluding Iranian crude shut in by sanctions) could shrink from around 5 million b/d currently to below 3 million b/d – most of it held by Saudi Arabia and the United Arab Emirates (UAE). If demand continues to grow strongly or supply disappoints, the low level of stocks and shrinking spare capacity mean that oil markets could be in for another volatile year in 2022,” IEA concluded.
The global refining industry ended 2021 on a high note, with both runs and margins improving. Refinery throughputs averaged 79.8 million b/d in fourth-quarter 2021, up 4.6 million b/d on a year ago. In 2021, global refining capacity fell for the first time in 30 years, by 730,000 b/d, as new capacity was more than offset by closures. In 2022, net additions are expected to amount to 1.2 million b/d, with runs forecast to gain 3.7 million b/d.
OECD total industry stocks declined by 6.1 million bbl in November, as rising crude and gasoline stocks were more than offset by draws in other products. At 2,756 million bbl, stocks were down 354 million bbl on a year ago and at their lowest level in 7 years. Preliminary data for December show OECD industry stocks falling by another 45 million bbl while volumes of oil held in floating storage rose.