Stock markets, especially in the US, were on the defensive yesterday. It looks as though that equity inventors have taken a step back to digest yesterday’s estimate on US consumer prices. It showed an inflation of 5.3% year-on-year versus a rise of 5.4% in July. This reading is the first sign that the price rise caused by a sudden jump in aggregate demand and by supply chain bottlenecks might be peaking. The question is whether the odds of tapering and the chances of a US interest rate rise has diminished or not.

The subdued stock market performance capped the initial rally that was triggered by an upbeat supply-demand forecast from the IEA, which we discuss below. One of the main features, similarly to the EIA and OPEC, was the significant cut in 2H 2021 non-OPEC supply due to several supply disruptions, chief amongst which is the one that took place in the Gulf of Mexico. These shortages and rising prices are expected to be countered by the release of Chinese and US SPR barrels. China announced yesterday that it will auction 7.38 million bbls of crude oil from state reserves on September 24. The US energy secretary has authorized the release of nearly 2 million bbls in the wake of Hurricane Ida and another 20 million bbls to comply with legislation related to infrastructure projects. SPR releases are always a good tool to calm nerves in the face of strong prices, nonetheless it is worth noting that these volumes are far below the downward revisions in non-OPEC supply for the rest of the year.

Anyone who had any doubt that the impact of the latest hurricanes will be felt for weeks to come has probably changed his/her mind after last night’s API statistics. As nearly 40% of the oil gas production is still offline in the USGC major categories registered hefty draws. It showed a decline of 5.4 million bbls in crude oil, 2.8 million bbls in gasoline and 2.9 million bbls in distillate inventories. The disruptions caused by weather events could easily turn out to be a game-changer for the oil balance for the rest of this year. Oil prices are once again on an upward trajectory this morning despite disappointing Chinese factory and retail sales data.

Emerging consensus

There is a huge amount of uncertainty surrounding global supply and demand estimates that has its origin in the health crisis. It is close to impossible to predict what pace the global economy will power ahead this year and next, how vaccine roll-out will help developing nations and whether there will be a fourth, fifth or sixth wave of Covid-19. For these reasons estimates and forecasts can vary greatly. The best example of this nightmare scenario forecasters are facing is the predicted call on OPEC oil, especially for the second half of next year. OPEC itself puts this demand figure at 30 mbpd compared to 27.90 mbpd from the EIA and 27.50 from the IEA.

In this highly unusual forecasting environment there is, however, a welcome consensus or pattern developing. Firstly, all three agencies agree that global oil demand will breach the magical 100 mbpd mark some time in the second or third quarter of 2022. Secondly, despite this meaningful increase in thirst for oil, next year will not necessarily be tighter than the remainder of 2021. Thirdly, this year’s hurricane season has a much greater and longer-lasting impact on the global oil balance than in previous years.

Last week the EIA revised down its call for OPEC oil for 4Q 2021, for the entire year and also for 2022. On Tuesday OPEC went the opposite direction and although it revised its 4Q demand estimate for its oil slightly down it upped it for 2021 and for 2022. Both reports showed a sizable cut in 3Q 2021 non-OPEC supply due to Hurricane Ida – 580,000 bpd the EIA and 530,000 bpd OPEC.

The findings from the International Energy Agency are closer to OPEC’s view and its flavour is best summed up by two quotes from yesterday’s Oil Market Report:

“Already signs are emerging of Covid cases abating with demand now expected to rebound by a sharp 1.6 mbpd in October, and continuing to grow until end-year. Global oil demand is now expected to rise by 5.2 mbpd this year and by 3.2 mb/d in 2022.”

“Outages wipe out OPEC+ crude oil boost.” Indeed, weather-related shutdowns will have a palpable impact on non-OPEC supply and consequently on global and OECD stock movements. The loss of production has been matched by the decline in refinery demand in the immediate aftermath of the storm, but the IEA sees refiners coming back online faster than supply. Due to the extended shut-in in the Gulf of Mexico production loss could amount as much as 30 million bbls. The recovery in output depends on how quickly repair works are completed and the IEA warns that onshore facilities at Port Fourchon, the main receiving point for Gulf of Mexico production might not be functional for several weeks.

The impact of the disruption in oil supply will be mitigated by the release of barrels from the Strategic Petroleum Reserve, yet global oil inventories are expected to decline in the second half of the year – to the extent of 1 mbd in 3Q and a much less 100,000 bpd in the last quarter of the year. Assuming that OPEC+ sticks to the latest agreement and adds 400,000 bpd of supply to the market every month until the end of the year, OECD oil inventories are expected to finish 2021 at 2.844 billion bbls, the lowest since 2H 2018 when Brent was trading around $80/bbl.

This year’s hurricane season will be a distant memory in the New Year. During the first half of it the growth in oil demand is still set to outpace non-OPEC supply increase (ie the OPEC call will be higher than during the comparable period of 2021), nevertheless the OPEC+ alliance is also expected to produce considerably more than at the beginning of this year. A tight 2H of 2021 could be followed by an oversupplied 1H of 2022 unless OPEC+ keeps fulfilling its role as the swing producers of the oil world. In this potential effort its own members might reluctantly provide some help. Last month OPEC+ members with output ceiling achieved a combined compliance of 115% based on data from secondary sources and Energy Intelligence. This impressive performance was partly down to the fact that some producing nations, namely Angola, Congo, Iraq, Nigeria, Kazakhstan and Malaysia, are at or very close to their production limit making it easier for the group to temporarily suspend tapering output constraints if necessary.