In times of uncertainty, it is best to play it safe and keep things steady. OPEC’s latest oil forecasts, released yesterday, are testament to this school of thought. The agency kept its major underlying assumptions unchanged. Among them is that global economic growth and therefore oil demand will extend its blistering recovery this year. World GDP growth forecast for 2021 was kept unchanged at 5.5% even as it acknowledged ongoing Covid-19 related challenges, chief among which is the spread of new variants. This is on the assumption that the pandemic will be largely contained in 2H21. The upshot is that its world oil demand growth forecast in 2021 forecast stood at 5.96 mbpd, unchanged from last month’s assessment.

On the supply front, non-OPEC liquids supply in 2021 was also kept steady. This was in spite of an upward revision to US supply. The US liquids production growth forecast for 2021 was revised up by 23,000 bpd and is now forecast to grow by 60,000 bpd y-o-y to reach an average of 17.68 mbpd. Overall non-OPEC supply growth is now pencilled in at 820,000 bpd for an average of 63.76 mbpd, on par with a previous estimate.

The unaltered forecasts for non-OPEC supply and global oil demand in 2021 mean that the demand outlook for OPEC crude ought to be steady. And sure enough, OPEC estimates the call on its crude to stand at 27.7 mbpd for this year and 29.05 mbpd in 2H21, unchanged from the previous report. All the while, OPEC crude oil production trended higher in June as it continued the process of rolling back supply curbs. The oil cartel’s output rose by 586,000 bpd last month to average 26.03 mbpd, according to OPEC-surveyed secondary sources.

Such is the wide gap between the group’s production and the looming call on its crude that the extent of stock draws should remain elevated over the coming months. This is true even with the anticipated return of OPEC+ barrels. In the meantime, in a sign of tightening supply/demand fundamentals, OPEC data showed OECD oil stocks in June were below the latest five-year average and the 2015-2019 average. In short, the build-up of excess stocks during the pandemic has been burnt off.

Meanwhile, OPEC took its first stab at assessing next year’s oil balance. Solid expectations exist for global economic growth in 2022 amid assumptions of continued progress in the containment of the Covid-19 pandemic. Global economic growth for 2022 is forecast at a healthy 4.1%, which in turn is expected to spur oil demand to reach pre-pandemic levels. World oil demand is anticipated to rise by 3.28 mbpd y-o-y in 2022, while total oil consumption is projected to average 99.86 mbpd, with the 100 mbpd mark exceeded in 2H22.

With regards to non-OPEC supply, the initial forecast for next year sees supply accelerating from current levels. Output from producers outside of the OPEC group is forecast to expand by 2.09 mbpd to average 65.85 mbpd on the back of stronger demand and higher oil prices. Among the main drivers for these gains is expected to be US shale producers as spending discipline across the sector gives way to production growth.

Based on the initial forecasts for world oil demand and non-OPEC supply in 2022, OPEC sees the demand for its crude at 28.7 mbpd, with the 30 mbpd threshold exceeded in 2H22. While this may at first appear supportive, much will depend on the OPEC+ producer alliance rubber stamping a deal to extend curbs beyond April 2022. Failure to do so risks opening the door to a supply glut in the second half of next year. Faced with the threat, the pressure is on OPEC and its non-OPEC allies to provide some clarity on its long-term production path sooner rather than later.

Upside? What upside?

In the meantime, oil prices extended their retreat yesterday following reports that Saudi Arabia and the UAE have agreed a compromise to allow OPEC+ to lift output. A deal has yet to be finalised but rather than assuaging fears of a full-blown battle for market share, traders are fretting over a bigger-than-expected output rise in the coming months. Even so, eternal oil bulls Goldman Sachs did their best to put a positive spin on the issue. The bank applauded the apparent OPEC+ breakthrough and said that the deal – if confirmed – would be a major bullish catalyst for prices over the coming months. It even went as far as saying that there is a $2 to $4 upside risk to its $80/bbl Brent price forecast. Such optimism, however, is currently lost on the oil market. The two leading crude markers are slipping further into the red at the time of writing putting them on track for their worst week since March.