The numbers say it all. WTI and Heating Oil reached their highest level since 2014. Brent and Gasoil have scaled peaks not seen for three years. The market is full of confidence. The question is whether this optimism is justified or not. After all, yesterday’s rally, which took the price of Brent $2/bbl higher, came after OPEC+ decided to stick to its gun in tapering supply constraints. It was not a surprise and it had been agreed in July. It might have triggered a fresh wave of buying because prices are at multi-year highs and being flexible on production increase had been mentioned a few times in the run up of meeting. The regular US pressure on the producer group to tame galloping prices might have also led to expectations that OPEC+ would pull the rabbit out of the hat.

It did not. Whilst the rally might have been vindicated by those who anticipated more it is worth having a look at what it actually means for the last quarter of 2021 assuming that there will be no divergence from the pre-determined path and another 400,000 bpd production increase will be in order in a month’s time. The latest OPEC report put the call on their oil at 28.91 mbpd in 4Q 2021 and with the current “automatism” the group would produce 28.26 mbpd (supposing a combined output of 4.22 mbpd from the three member countries with no ceiling). This would result in a stock draw of 650,000 bpd, which, in all fairness, will probably be more than that given that some of the members are already pumping at full capacity, but it is still considerably less than the 2.4 mbpd seen in 3Q.

Given the significant decline in OPEC call in 1H 2022 yesterday’s decision to boost production by “only” 400,000 bpd in November was probably the most sensible one. In the light of the estimated 4Q 2021 and 1H 2022 oil balance and because of growing concerns about stagflation -stock markets finished the day sharply lower yesterday- $80+ Brent price might feel toppy, and the move up yesterday might look exaggerated. But prices are only seen uncomfortably high until the first cold spell arrives in the northern hemisphere creating additional demand and triggering a fresh bout of buying. In the short-term there is still room on the upside, the current backdrop suggests.

The future is still bright

If OPEC’s latest World Oil Outlook released last Tuesday is to be relied upon then the energy transition will not jeopardize the leading role fossil fuel plays in the energy mix for the next 10-15 years. There is no better way to put it, the organization is upbeat on global oil demand for years to come. In the foreword of the Executive Summary OPEC’s Secretary General, Mohammad Barkindo emphasizes that with the global economy doubling in size up until 2045 and the world’s population growing by 1.7 billion people primary energy demand will increase by 28%. Whilst the largest growth is contemplated in the renewables sector followed by gas, oil will still be the leading actor in the world of energy so much that underinvestment remains the biggest challenge for the oil industry.

The research arm of OPEC is very optimistic about the potential growth in oil consumption for the next 24 years. Although global oil demand was revised down from last year’s forecast by about 1 mbpd, it starts growing solidly from this year again and will start peaking around 2035 at 107.9 mbpd edging up to 108.2 mbpd 10 years later. This growth (17.6 mbpd from the 2020 devastation caused by COVID-19) will exclusively take place in the developing part of the world. OECD oil demand is forecast to decline by 7.9 mpbd but this will be more than offset by the 25.5 mbpd rise in non-OECD consumption. China and India will be responsible for 10.3 mbpd of this increased thirst with oil demand increasing by 6 mbpd in the latter country alone.

Changing climate and global warming are clearly forcing consumers to change their taste for different products. The 2010 issue of the World Oil Outlook estimated that middle distillates, mainly gasoil and diesel will make up 33% of the total demand by 2030. This share has fallen below 28% whilst ethane and LPG consumption for 2030, that stood below 10% of the total eleven years ago have gained considerable ground and now has a 14% slice of the total demand cake.

On the supply side producers outside of OPEC will not be able to match the increase in demand. Non-OPEC supply will only grow by 2.5 mbpd to 65.5 mbpd between 2020 and 2045, roughly the same as a year ago. US tight liquids supply will peak in 2030 at 15.2 mbpd declining to 13.3 mbpd by 2045. The most resilient non-OPEC producer will be Brazil where supply should steadily increase from 3.7 mbpd last year to 5.3 mbpd 25 years later.

The net result of these projections is that OPEC’s role in balancing the market will grow in coming years and decades, simply because the demand for their liquids will keep swelling. The call on their oil and other liquids is estimated to jump from the pandemic-induced trough of 27.7 mbpd last year to 33.8 mbpd by 2025, 38.5 mbpd in 2035 and 42.7 mbpd by 2045. In percentage terms, OPEC’s weight in balancing the global oil market will increase from 30.5% in 2020 to 32.6% in 2025, 35.7% in 2035 and 39.5% ten years later. The long-term oil balance, as seen in Helferstorferstrasse in Vienna, will guarantee that the 60-year-old oil cartel will remain an unavoidable and increasingly relevant force in shaping worldwide supply and consumption for at least the next two decades and possibly beyond.