Everything that has a beginning has an end. OECD oil inventories have declined since 3Q20 and in doing so have sunk to their lowest levels since 1Q15. Yet as we prepare to say goodbye to 2021, we are also poised to bid farewell to the long-running drawdown in global oil stocks. That was the key takeaway from the latest IEA monthly oil market report which was released yesterday.

In the immediate term, it’s a case of business as usual. Global oil demand is set to strengthen over the remainder of the year. Indeed, the IEA upped its global oil demand estimate for the current quarter amid pent up travel demand for gasoline. World oil consumption is now expected to average 98.91 mbpd in 4Q21, which is 50,000 bpd more than last month’s forecast. For 2022, world oil demand growth pencilled in at 3.37 mbpd, up slightly from a previous forecast of 3.29 mbpd.

There is, however, one potential fly in the ointment for the oil demand recovery. New waves of Covid-19 cases are slamming through Europe, so much so that several governments have recently reimposed restrictions. The impact has thus far been negligible. That being said, the risk is there for the situation to escalate and mobility levels to be severely undermined in the coming months.

On the supply front, it’s a case of full steam ahead. Supply is playing catch up with demand at a faster than expected clip. Global oil supply has been revised 330,000 bpd higher for 4Q21, to reach 99.2 mb/d by year-end. The IEA now forecast a rise of 1.5 mbpd in global oil output over November and December, with the US alone set to account for 400,000 bpd of those gains. Oil production in the US is ramping up in tandem with stronger oil prices, as current prices provide a strong incentive to boost activity even as operators stick to capital discipline pledges.

Higher anticipated flows from the US together with the ongoing easing of OPEC+ supply curbs have the makings for slightly loosened oil balances. And sure enough, the IEA now expect the supply deficit to stand at 460,000 bpd in the final quarter of 2021 versus a previous estimate of 700,000 bpd. In 1Q22, the group could pump 1.1 mbpd above the call on its crude, provided it continues to unwind its cuts and assuming Iran remains under sanctions. By 2Q22, OPEC+ crude oil output could rise to 2.2 mbpd above the call. In other words, the spectre of a supply surplus looms large.

As things stand, oil consumption will continue to outpace supply until the end of this year, but it looks set to be a different story in 2022. Better said, the winds of change are finally beginning to blow for the oil market. The potential inventory builds pencilled in for next year could offset a prolonged period of stock draws that are set to last until the end of 2021. The upshot is that a reprieve from rising oil prices may well be on the horizon.

Struggling for upside

OPEC took a page out of the IEA playbook in also warning of an impending supply surplus. The oil cartel’s Secretary-General Mohammad Barkindo said yesterday that he expects an oil supply surplus as early as next month. He added that the market will likely remain oversupplied next year. With OPEC seeing signs of an oil supply surplus building, there is every likelihood that it will forego returning the next 400,000 bpd tranche when it meets on December 2.

All the while, the energy complex got a small boost from a spike in gas prices. The European gas market jumped on Tuesday as news broke that Germany suspended the certification process for the Nord Stream 2 pipeline. The latest setback for the controversial pipeline that would link Europe with Russian gas will only add fresh uncertainty over gas supplies to the region.

Gains, however, were capped by a steadfast dollar. The US currency topped a fresh 16-month high against a basket of its major peers on the back of solid macro data. US retail and sales jumped by 1.7% in October as consumers continued to spend on goods, despite supply chain problems. Meanwhile, US industrial production rebounded 1.6% in October after falling 1.3% in September.

Staying in America, oil prices are taking their cues from an update concerning US oil stocks. Overnight, the API reported a smaller-than-expected 655,000 bbls rise in crude stocks last week. Of greater concern was a forecast-beating decline of 2.8 million bbls in gasoline inventories. If confirmed by the EIA, this would mark the sixth straight weekly drop and heap more upward pressure on US gasoline prices. In contrast, distillate fuel stocks were little changed with a modest weekly gain of 107,000 bbls.