While the global economic recovery is poised to continue, the demand side of the oil equation faces several challenges. That was the message from OPEC’s latest monthly report, released yesterday. A combination of elevated energy prices, rising COVID-19 infections, supply chain issues and growing inflation are expected to partially cap oil demand in the near-term. In view of this, OPEC trimmed its global oil demand estimate for the final quarter of 2021. The world’s thirst for oil is now expected to average 99.49 mpbd in the current quarter, 330,000 bpd less than previously thought. As a result of this weakness, global oil demand growth for the year was revised lower by around 160,000 bpd compared to last month’s assessment, to stand at 5.65 mbpd.

In short, global oil demand growth is anticipated to continue to grow in 4Q21, albeit at a more modest pace than previously thought. All the while, on the supply front, OPEC crude production rose by 218,000 bpd last month to 27.45 mbpd, according to OPEC-surveyed secondary sources. Yet this was less than the 254,000-bpd increase permitted under the current supply deal. This came as several members struggled to fulfil their obligations to gradually raise supply, and none more so than Nigeria. The WAF producer was the biggest drag on output in October. Its production declined by 45,000 bpd m-o-m on the back involuntary outages, including the force majeure on the Bonny Light crude stream since 27 October.

Nevertheless, OPEC’s production shortfall will only help to safeguard the depletion in global oil stocks that began in the second half of last year. OPEC sees the call on its crude in the current quarter at 29.16 mbpd, 200,000 bpd less than last month’s estimate. The upshot is that oil inventories will continue to trend lower in the year-end period, albeit at a more modest clip than previously envisaged.  Drawdowns in the current quarter are unlikely to match the 2.2 mbpd seen in 3Q21. This, in turn, may suggest that oil prices have already peaked this year. Echoing this sentiment is the EIA which earlier this week forecast that Brent and WTI will hold steady at current levels. Better said, there will be no final flourish for the recent oil rally.

Looking ahead to next year, the demand outlook is set to be underpinned by solid economic growth. For 2022, growth in global oil demand remains unchanged compared to the previous month’s assessment, to stand at 4.2 mbpd. World total demand in 2022 is now estimated to reach 100.59 mbpd around 500,000 bpd above 2019 levels. However, the early part of next year brings with it a gloomier outlook. The seasonal pullback in global oil demand at the turn of the year will see the call for OPEC crude plummet to 26.81 mbpd in the first quarter of 2022. Assuming OPEC+ maintains its current production strategy, the implication is that the string of quarterly declines that began in 3Q20 will come to an end in the next quarter. In other words, the oil market is sleepwalking into a supply surplus. OPEC and its allies will at the very least need to put a pause on the easing of their supply curbs in the new year. Inaction will result in global oil stocks swelling once again and oil prices making a beeline lower.

Johan to the rescue

A sense of calm returned to the energy complex yesterday after Wednesday’s bloodbath. Oil bulls recovered their nerve, but it almost wasn’t the case. Prices took another step lower in the early part of trading, with Brent and WTI shedding more than a dollar, as OPEC cut the demand outlook for the final quarter of this year. Adding to the unease was a perky dollar. The greenback topped a fresh 2021 high against a basket of its major peers as US inflationary pressures gathered pace. Both crude markers eventually settled slightly higher amid an unexpected supply disruption in the North Sea. Output from Equinor’s 535,000 bpd Johan Sverdrup was abruptly shut down due to a power failure. Power has since been restored and efforts are ongoing to restart production.

Meanwhile, Iraq’s oil minister helped soothe fears of an impending return to a supply surplus. He hinted that OPEC+ will review its crude supply policy in the first quarter of next year. This suggests that the producer alliance is aware of the fact that the oil balance faces a precarious start to 2022. Returning to the here and now, oil prices are coming under additional downward pressure at the time of writing as the dollar flirts with fresh highs. Oil is hurting in the face of the stronger dollar, and will continue to do so for the foreseeable future.