The price action in the oil markets was initially subdued yesterday. Both crude benchmarks then turned positive following reports that a ship was stuck in the Suez Canal. Shortly after, prices plunged into red after China announced plans to release state crude oil reserves for the first time. The move is aimed at cooling rising feedstock costs for domestic refiners, which in turn could translate into lower crude import demand. Oil prices subsequently stayed in negative territory as market players digested the impact of Hurricane Ida on the US oil complex.

EIA data showed that domestic crude production plunged by 1.5 mbpd to 10 mbpd last week, the lowest since February’s Texas deep freeze. Trading flows were also significantly affected as shipping terminals temporarily went offline. Gross crude imports fell by 530,000 bpd while exports plunged by almost 700,000 bpd. At the same time, crude throughputs averaged 14.3 mbpd, down from nearly 16 mbpd in the prior week. Yet the net result was rather underwhelming. US crude stocks fell by a smaller-than-expected 1.6 million bbls.

The major stock swings were to be found on the product front. Gasoline stocks fell by a whopping 7 million bbls to 220 million bbls, the lowest since November 2019. This came on the back of reduced production and solid demand. Refinery utilisation rates fell to six-month low of 81.9%, compared to 89.5% in the previous week. All the while, gasoline demand held steady at 9.6 mbpd as travellers geared up for the Labour Day break. Distillate fuel stocks also trended lower with a sizeable 3.1 million bbls decline. The upshot is that total US commercial oil inventories fell by more than 10 million bbls last. And with the restart in offshore crude production lagging, the odds are that the Ida effect will still be felt in the coming weeks.

The 100 million bpd question

Oil-price forecasters mostly focus on two things: supply and demand. In the case of the former, the near to medium term outlook is relatively straightforward. Indeed, the supply side of the oil equation is enjoying a spell of certainty under the auspices of OPEC+. There is consensus that the producer alliance will stick to plans to return 400,000 bpd a month over the remainder of the year and into the early part of 2022. In contrast, forecasting demand is proving to be a tricky exercise given the ongoing pandemic. Several questions are hanging over the oil market, among the most pertinent of all is when world oil demand will return to the pre-pandemic level of about 100 mbpd, if at all.

Global oil demand fell to an average of around 90 mbpd last year during the depths of the Covid-19 crisis. It has since rebounded to around 98.5 mbpd, according to the IEA/EIA/OPEC triumvirate. Back in March, BP suggested that global oil demand may have hit the peak in 2019 and may never reach the magic number of 100 mbpd again. With hindsight, this pessimistic view has proved to be way off target. As things stand, there is general agreement that global oil demand will recover to pre-Covid-19 levels of around 100 mbpd.

That being said, recent forecasts for oil demand are looking softer. Growth for the near to medium term outlook is being progressively downgraded due to the resurgence of Covid-19, particularly in Asia. Take the EIA as a prime example. The agency previously forecast that global oil demand would recover above the 100 mbpd threshold in 4Q21. In its September STEO, released earlier this week, it now expects this milestone to be reached in 2Q22. This echoes the current thinking from the IEA and OPEC. Both predict that the world’s thirst for oil will exceed 100 mbpd in the second half of 2022. However, this time frame is at risk of being pushed back when they release their updated estimates next week given the recent proliferation of the Delta variant. In the meantime, French bank Societe Generale had a similar message for oil markets last week. It expects oil demand to recover to a “pre-COVID” 100 mbpd in the third quarter of next year.

The outlooks, which reflect a consensus of sorts, suggest demand will normalize at some point in 2022. If this view proves to be on target, it means that it will have taken more than 2 years for demand to rise above the pre-COVID level. But as they say better late than never. Solid growth expectations for next year coupled with a widely-expected recovery in travel will play a key role in pushing oil consumption back above 100 mbpd.

Nevertheless, there are some downside risks to the demand outlook, chief among which is the future trajectory of the pandemic. Further Covid-19 outbreaks, even in countries with rising numbers of vaccinated people, could push the return to pre-Covid levels beyond next year. The same is also true of slower-than-anticipated vaccine rollouts, especially in developing nations. Alongside the threat of worsening pandemic dynamics, the prospect of tighter monetary conditions in the US and beyond could be a blow to the economic and fuel demand recovery. Even so, as things stand, the market is anticipating a return to 100 mbpd at some point next year. If the actual recovery tracks with these predictions, it will provide the clearest signal yet that the demand side of the oil equation has successfully shaken off its Covid woes.