The signs were ominous last week. When the EIA released its latest monthly update, the writing was on the wall that OPEC and the IEA would follow in the footsteps of the EIA. After all, the protracted spread of the coronavirus in different parts of the world, the uneven worldwide distribution of vaccines, supply bottlenecks created by the shortage of workforce, raw materials and components and the consequent rise in both consumer and producer prices have all foreshadowed an almost inevitable worsening of global demand and therefore oil balance. As a result, the global economy is not expanding at the rate it was expected. Sure enough, the Energy Information Administration was not shy to alter its view on global oil consumption for 3Q (-510,000 bpd) and 4Q (-290,000 bpd) of 2021. For next year the downward revision was 240.000 bpd.
The noises coming out of OPEC in the past few days also implied that previous demand projections had been overoptimistic. Global oil demand growth for 2022 that was seen at 3.28 mbpd in August was upped to 4.2 mpbd by the research arm of the organization just before the last ministerial meeting. Despite this healthy confidence OPEC sources hinted at a sizeable retraction on these estimates due to the uncertainty caused by the spread of the Delta variant worldwide.
Despite this warning and the hefty cuts in consumption by the EIA what we got yesterday was a powerfully bullish set of data. The only part of the report that somewhat justified expectations for a downside amendment in demand estimates was for next quarter that is now 120,000 bpd lower than last month. But even this decline is more than offset by the 230,000 bpd increase in 3Q demand. In total, global oil demand is now 110,000 bpd higher for the whole of 2021 and it will grow by 5.92 mbpd year-on-year, the same as last month. Moving into 2022, the advertised correction in demand growth never materialized. It is now seen at 4.16 mpbd, a mere 40,000 bpd lower than the early September projection. As the absolute 2022 figure is 980,000 bpd higher than last month the annual demand expansion has jumped 870,000 bpd from August.
If bulls were pleased with the revisions in consumption, they must have been over the moon when they cast their eyes on non-OPEC supply figures. There were downward corrections across the board – 530,000 bpd for 3Q 2021(admittedly due to the weather-related shut-downs in the USG, which has a profound impact on OPEC call), 150,000 bpd for the whole of 2021 and 150,000 bpd for the entirety of next year. When we draw a line here the net result is truly dizzying. The call on OPEC has been upped for the remainder of the year by 350,000 bpd (that is 2H 2021, to be prices), 1.33 mbpd for 1Q 2022 and by 1.13 mbpd for the whole of 2022.
Of course, demand estimates for OPEC oil are only meaningful numbers if they are set against actual or perceived output from the producer group. Luckily, help is at hand as the OPEC+ alliance mapped the way forward. Whether they will follow this route next year is open for debate but for the balance of this year a production increase of 400,000 bpd, of which 260,000 bpd is OPEC’s share, seems more than plausible. That would mean an OPEC output of 26.70 mbpd in the current quarter and 28.10 for 4Q against an OPEC call of 29.11 mbpd and 28.91 mbpd. The third quarter of the year should see global stocks dropping at the rate of 2.41 mbpd!! (again, partly due to Ida) whilst this depletion will moderate to 810,000 bpd towards the end of the year. Based on these numbers OECD oil inventories could fall as low as 2.784 billion bbls by the end of the year!
The scheduled continuous increase in OPEC+ production makes the first half of 2022 look tricky. Demand for OPEC oil will be way below the planned production levels leading to a reversal of the current trend in stock movements. The updated figures show a global stock build of 2.30 mbpd in 1Q 2022 and 1.67 mbpd in 2Q 2022 in case of producer group sticks to the current output policy. Will they? Well, probably it will depend on the price level. We could easily see the monthly production increase to be put on hold in case of a prolonged price weakness. Next year, however, is still far away and we expect a few eventful months for the rest of 2021. As noted in yesterday’s report the market is currently stuck between the negative economic impact of the Delta mutant of the virus and the expected demand growth in the probably not so distant future. There are those who see oil at $80/bbl by the year-end and those who forecast a price around $65/bbl. Based on yesterday’s OPEC report if we agreed with the latter group, we would be probably both be wrong.
Under the circumstances it is understandable that oil prices finished the day higher. What is somewhat curious is that the two crude oil futures contract only managed to advance 60-70 cents/bbl. Mother Nature, as revealed in the OPEC report, has a long-lasting impact on US oil production and therefore on the global oil balance. Not only 40% of the USGC oil and gas production is still shut in but the next danger has surfaced, too. Hurricane Nicholas has arrived at Texas and Louisiana bringing with him flesh flooding, winds and storm surge. Producers have been forced to remove non-essential personnel from oil and gas platforms. Tomorrow’s weekly oil statistics on US oil stocks are certain to show drawdowns in the major categories and the recovery in oil production, exports and imports is nothing but onerous.
The virus, fears of inflation (US core inflation data is out this afternoon, retail sales and jobless claims are released on Thursday), possible central bank’s tapering, proposed US corporate tax increase can all shake inventors’ confidence, and they could have an effect on oil market sentiment. Global oil inventories, however, are destined to decline further this year putting a floor under every attempt to push prices lower.