Those still doubting the current challenges facing the oil market need to look no further than the latest IEA monthly report, released yesterday. The agency revised down its forecast for global oil demand by 580,000 bpd for 1Q21 and 280,000 bpd for 2021 amid a fresh bout Covid-driven demand destruction. The resurgence in cases across the globe and subsequent tightening of lockdown measures is limiting mobility and therefore constraining fuel demand. As a consequence, the IEA expects world oil consumption to decline marginally this quarter compared to 4Q20. Hardly the start of the new year that bulls were hoping for.
That said, while the near-term demand environment continues to be gripped by weakness and uncertainty, the future is brightening. A widespread vaccination effort and an acceleration in economic activity is expected to spur stronger growth in the second half of the year. Global oil demand is forecast to reach a high of 99.05 mbpd in 4Q21, up 5 mbpd from the current quarter and a whisker away from pre-pandemic levels. However, the projected recovery in oil consumption depends on global immunisation campaigns overcoming doubts regarding efficacy, availability, and deployment. Only time will tell whether the predicted vaccine impact on oil consumption is vindicated. For now, though, it’s a case of “things can only get better” from this point forward.
With regards to the other side of the oil coin, it’s still very much a case of onwards and upwards. The IEA expects global oil supply to increase by 1.2 mbpd in 2021. Spearheading this rebound is rising OPEC+ output. The producer group is poised to continue gradually easing crude production cuts to 5.8 mbpd in 2Q20 from 7.05 mbpd currently. All the while, the supply outlook for countries not taking part in the OPEC+ agreement has seen further improvements. Producers outside the bloc are once again putting their foot on the supply pedal in response to higher prices and a tightening market. As a result, 2021 estimates for production from these countries outside of OPEC+ have been revised up by an average 175,000 bpd.
The bulk of these gains owes much to a slightly more optimistic view for US oil supply. This year’s forecast has been raised by nearly 200,000 bpd from last month’s report as higher prices spur increased activity in the shale patch. Even so, the US is still expected to post another annual decline in 2021. Crude oil production is now forecast to decline by 200,000 bpd as major operators continue to prioritise capital discipline as opposed to production growth.
The rise in global oil supply coupled with a mildly softer near-term demand outlook usually spells bad news for the call on OPEC crude. And this time is no different. The IEA said that demand for OPEC crude is now expected to average 27.7 mbpd in 2021, 300,000 bpd less than previously thought. Nevertheless, this figure is well above the oil cartel’s latest production targets. The upshot is that the rebalancing which began in earnest during the middle of 2020 will continue throughout this year.
Assuming OPEC+ achieves 100% compliance with the latest agreement, the IEA reckons global oil stocks could decline by 1.1 mbpd in 1Q21. This figure rises to 2 mbpd in 3Q21 and a smidge under 3 mbpd in the final quarter of the year as the expected vaccine-driven demand recovery shifts up a gear. The IEA’s balances imply that OPEC+ supply management together with the global vaccine roll-out is putting oil fundamentals on a stronger trajectory. As much as this will help inspire confidence in meaningful stock draws later this year, there’s still quite some way to go.
The softening demand outlook from the IEA fell on deaf ears yesterday. Instead, the two leading crude markers rallied around a dollar, taking their cues from rising shares on Wall Street on optimism that the incoming administration will launch a hefty fiscal relief package. Joe Biden’s Treasury Secretary nominee Janet Yellen laid out the case for the US to act big on the next Covid relief package. The former Fed Chair made her position clear that the US should spend heavily to ensure the economic recovery. Suffice to say, this provided a good backdrop for oil and other risk assets.
Adding to the feel-good factor were bullish comments from OPEC’s head honcho. Mohammad Barkindo expressed cautious optimism that the oil market will recover this year. Furthermore, sentiment was also buoyed by fresh signs of a downturn in US shale. The latest EIA drilling report showed US tight oil supply is expected to extend its decline next month with a drop of 90,000 bpd. Staying in the US, market players also took heart from the end of the Trump era. Donald Trump left office yesterday with the lowest ever approval rating of any President in history. The last act of his historically unpopular presidency was to issue a wave of pardons and commutations to more than 100 individuals.
This morning, the energy complex is inching higher amid a Reuters poll pointing to another weekly drop in US crude stocks. Still, concerns about the pandemic are never far from investors’ minds. The WHO reported that Covid weekly deaths hit a record last week. All the while, China’s announced stricter Covid-19 control measures as it grapples with its most severe outbreak since March 2020.