By Irina Slav
Oil was off to a reasonably good start this year thanks to the start of a vaccination push and a Saudi commitment to cut more production. The continued surge in Covid-19 infections and a new flare-up in China shook optimism and weighed on prices, but now things appear to be looking up based on the latest supply and demand data and forecasts.
For starters, in the good news corner, we have steadily declining crude oil and fuel inventories in the United States. Reuters’ John Kemp wrote in a Friday column that total crude and fuel stocks in the U.S. had fallen by a cumulative 130 million barrels since mid-2020 and 13 million barrels in the third week to January alone. Crucially, gasoline stocks were down almost to the five-year average, suggesting that demand is picking up meaningfully.
In forecasts, Wood Mackenzie said in its latest short-term demand outlook that it expected demand for oil to rise by 6.3 million bpd from last year to 96.7 million bpd. This will still be about 3 million bpd below pre-pandemic levels, but as far as demand rebounds go, a rebound to two-thirds of lost demand is pretty decent.
Separately, the consultancy said this year might see the start of a new supercycle in commodities as the economy recovers and pent-up consumer demand is unleashed. This recovery will not be even, Wood Mackenzie’s chief analyst Simon Flowers noted, but in parts of the world, it would be considerable, despite the fact the pandemic will not disappear completely for a while yet.
The U.S. Energy Information Administration also sounded an optimistic note recently, again grounded in economic recovery and mass vaccinations. The EIA said in its latest Short-Term Energy Outlook that it expected global liquids consumption to rise by 5.6 million bpd this year and another 3.3 million bpd in 2022. The agency also noted it expected a return to more normal travel patterns by the middle of this year, which would be particularly bullish for oil.
A third optimistic voice, although as wary as the others, is OPEC’s. The cartel expects oil demand to rebound by 2.6 million bpd in developed markets and 3.3 million bpd in developing markets, led by China and India.
Although the consensus seems to be that a full recovery of oil demand will not be one of the events that will mark 2021, it may well be on its way in a couple of years. Schlumberger said last week as it reported Q4 results that it expected a full recovery to 2019 levels by 2023. That’s despite the energy transition agenda of both the European Union and the Biden administration, which many expect to hurt oil demand.
On the negative news front, there is little change. Uncertainty remains the word of the year as governments struggle to distribute enough vaccine doses among their populations. In Europe, a rift erupted between Brussels and AstraZeneca after the drugmaker said it will supply a lot fewer vaccine doses than agreed. The company has now agreed to direct an additional nine million doses to the EU, making the total 40 million. However, this is only about half of what the EU needs, and vaccination delays are already being affected.
Across the Atlantic, things are similarly difficult. All fifty U.S. states have reported shortages of vaccine doses, and even places where doses are still available are finding it hard to distribute them. So far, the U.S. has ordered some 1.2 billion vaccine doses from several drugmakers.
In oil supply, the focal points remain Iran and Libya, after Iraq pledged additional cuts for January and February to comply with its OPEC+ commitments. Libya’s production, however, is currently constrained by the Petroleum Facilities Guard, which is once again threatening oil port blockades unless overdue salaries are paid. Iran, meanwhile, is boosting its oil production and exports in anticipation of a deal with the Biden administration. Last month, deputy oil minister Amir Hossein Zamaninia said the country planned to boost production to 3.9-4 million bpd, adding that the market should have no problem swallowing this amount. Indeed, based on demand recovery projections, an additional 4 million bpd would not be excessive, as long as OPEC+ continues cutting at current rates and Saud Arabia continues cutting an additional 1 million bpd on top of its OPEC+ commitments.
Meanwhile, U.S. producers are being cautious. Production is still around 11 million bpd as drillers wait for higher prices for longer before they start ramping up. A set of Biden executive orders, meanwhile, have restricted new drilling, which would eventually have a positive effect on prices, and we may see the start of a production ramp-up later this year.
All in all, slowly but surely, the oil market is crawling towards rebalancing. It won’t happen quickly, and there will almost certainly be setbacks amid the emergence of new coronavirus variants that medical experts warn appear to be more highly contagious and possibly more deadly than the original strain. Yet if OPEC+ sticks with its cuts and vaccinations progress, despite the challenges, the world—and oil demand—will start to return to normal before this year’s end.