A stronger global economy this year is set to accelerate oil demand growth to 5.5 million barrels per day (bpd), the U.S. Energy Information Administration (EIA) said in its Short-Term Energy Outlook for April this week, raising its demand growth forecast by 200,000 bpd.
Global economic growth is now expected at 6.2 percent in 2021, up by 0.4 percentage point from the March STEO, as per estimates from Oxford Economics which the EIA uses for prediction modeling.
Next year, global oil demand is set to rise by another 3.7 million bpd over 2021 and exceed the pre-pandemic levels from 2019. World consumption of petroleum is set to average 101.3 million bpd in 2022, EIA’s latest estimates show.
The 2021 global oil demand growth was lifted by 200,000 bpd, while the 2022 growth estimate was revised down by 100,000 bpd from the March forecasts, which had pegged demand growth at 5.3 million bpd this year and 3.8 million bpd in 2022.
The EIA has slightly more conservative estimates about global oil demand growth than OPEC. The latest upward revision from the American administration puts this year’s demand growth still below OPEC’s estimate, which had it at 5.9 million bpd in its March Monthly Oil Market Report. OPEC’s April monthly report is due out next Tuesday, April 13. In the March report, OPEC raised its outlook for the second half of 2021. Still, it revised down its estimates for oil demand for the first half of 2021 due to extended lockdowns in major economies in Europe and high unemployment rates in the United States slowing the recovery.
Last week, the OPEC+ Joint Technical Committee (JTC) reportedly revised down the demand growth estimate to 5.6 million bpd for 2021.
However, OPEC+ signaled confidence in demand rebounding strongly later this year by deciding to return around 2 million bpd by July by easing the production cuts by over 1 million and Saudi Arabia gradually reversing its extra 1-million-bpd cut.
The key question for the oil market and all forecasters now is whether expectations of robust oil demand growth in the second half of the year will materialize. The key wild card, of course, is the pandemic and the ability of major economies to exit lockdowns and other restrictions with strong economic growth. Signs from the United States and China point to robust growth. The easy monetary policy in many continues will also support economic activity and, as an extension, oil demand growth. Progress in vaccination programs would allow more people to start traveling more, including on international airline routes, which is set to spur not only economies but also jet fuel demand which has been badly hit by the pandemic.
Despite lingering uncertainties over the pace of the recovery, most analysts continue to expect strong economic growth over the second half of 2021, which in turn is set to boost oil demand.
The EIA expects global oil markets “to become much more balanced” in the second half of 2021.
“Forecast increases in global oil supply will contribute to a mostly balanced market during the second half of 2021. However, the forecast depends heavily on future production decisions by OPEC+, the responsiveness of U.S. tight oil production to oil prices, and the pace of oil demand growth, among other factors,” the EIA said in the April STEO.
U.S. shale will respond to higher oil prices by increasing production between the second quarter and the fourth quarter of 2021, EIA’s estimates show. However, the 2021 and 2022 averages for total U.S. crude oil production were reduced by around 100,000 bpd and 160,000 bpd, respectively, from the March forecasts.
American oil production is set to average 11.04 million bpd this year, the latest projections show, down from the 11.1 million bpd estimate from last month. Production in 2022 will average 11.9 million bpd, as per the April estimate, down from 12.0 million bpd expected in March. Last month, however, the EIA had already raised its 2022 estimate by as much as 500,000 bpd because of higher expected oil prices.
This year, thanks to expectations that WTI Crude prices will stay above $55 per barrel, U.S. oil production is set to increase from an average 10.9 million bpd in the second quarter to nearly 11.4 million bpd by the fourth quarter, the EIA said. In the fourth quarter next year, U.S. oil production is expected to average above 12 million bpd—at 12.18 million bpd.
Despite the spending discipline of major U.S. producers, higher oil prices are set to put the shale patch back on a growth trajectory, even if this growth is slower than what we saw before the pandemic.