Balancing the crude picture
Expectations for last week’s OPEC+ meeting were low. The general consensus was that the oil magnates would not agree to any further production cuts, and that maintenance of output cuts of 7.2m barrels per day (bpd) was all the market could hope for. In the end – and after two days of negotiations – Russia and Kazakhstan were permitted to increase output by a combined 75 bpd in February, and by a further 75 bpd in March. But Saudi Arabia helped to counter the increase with a surprise unilateral announcement that it would cut its output by an extra 1m bpd over February and March. This means that OPEC+ cuts will take 8.125m bpd and 8.05m bpd out of the market for February and March respectively.
“We believe that the changes the group made to the deal will be enough to ensure that the market does not return to surplus in 1Q21,” said Warren Patterson, head of commodities strategy at ING. “While for the remainder of the year, we would expect the market to continue drawing down stocks.”
The US Energy Information Administration, in its latest Short-Term Energy Outlook, forecasts crude oil production from OPEC will average 27.2m bpd in 2021, up from an estimated 25.6m bpd in 2020. That forecast reflects OPEC’s announced increases to production targets and a continuing rise in Libya’s production.
While collectively they hold the majority of the world’s production, OPEC+ members were not the only producers to support oil trade and prices in 2020. Non-OPEC+ producers also moved quickly to shut in production in the first half of 2020 and at the peak in May, there was around 2.7m bpd of non-OPEC – excluding US – production shut-in. However, much of this has now returned to the market. Consequently, growth for non-OPEC supply is expected to be limited. ING predicts a less than 500 bpd increase year-on-year, which “still leaves non-OPEC supply in 2021 well below 2019 levels”.
Iran’s possible re-emergence on the global oil supply scene presents a wrinkle in an already obscured outlook. With president-elect Joe Biden’s win the US is expected to return to the Joint Comprehensive Plan of Action on Iran’s nuclear programme. In May 2018, President Donald Trump abandoned the landmark deal and in November that year, he reinstated sanctions targeting both Iran and states that trade with it. If the US returns to the accord, between 1.5m and 2m bpd of Iranian supply could return to the market. That’s the if; the when will depend on the priorities of the incoming president. “If we were to see a fairly quick return of Iranian supply over 1H21, this could put some pressure on the market, with the market likely finding it difficult to absorb additional barrels,” Patterson said. “However, if we only see Iranian supply starting to come back in the latter part of next year, the market should be able to digest this oil more easily, given expectations of demand continuing to recover as we move through the year.”
But do not expect fireworks for demand in 2021. ING expects demand to grow by 6.7m bpd in 2021, but that only partly offsets the approximate 10m bpd fall in 2020. “It appears we will have to wait until at least 2022 to reach pre-Covid-19 demand levels once again,” Patterson said, noting that robust demand recovery rests heavily on the delivery of an effective vaccine.
The EIA reports that global liquid fuels consumption declined by 9m bpd in 2020, the largest annual decline in EIA data going back to 1980. It forecasts that consumption will rise by 5.6m bpd in 2021 and by 3.3m bpd in 2022. However, it caveats that with: “Despite EIA’s forecast of growing consumption in 2021, global consumption of petroleum and other liquid fuels does not return to 2019 levels in the forecast until early 2022.”
In terms of where to look for supply, the EIA expects oil consumption growth to be fairly even between Organization for Economic Cooperation and Development (OECD) countries and non-OECD countries. Forecast non-OECD liquid fuels consumption is expected to grow by 3.1m bpd in 2021 (6%) and by 1.6m bpd (3%) in 2022. China and India will lead non-OECD liquid fuels consumption growth with the EIA predicting that consumption in China will grow by 900,000 bpd (6%) in 2021 and by 400,000 bpd (3%) in 2022. Consumption in India is forecast to grow by 500,000 bpd (12%) in 2021 and by 200,000 bpd (4%) in 2022.
In a final note on inventories, the EIA estimates that global oil inventories increased by 1.2bn barrels from the end of 2019 through to May 2020. However, from June to December, estimated inventories fell by 500m barrels. EIA expects global oil inventories to “generally draw in 2021 and 2022, as forecast global oil demand continues to gradually return to pre-pandemic levels, outpacing supply increases”. While supply is also expected to rise in this period, voluntary production restraints from OPEC+ and the sting of low oil prices on some non-OPEC production will limit global supply increases. As a result, the EIA expects global oil inventories to decline at a rate of 600,000 bpd in 2021 and 500,000 bpd in 2022. “This rate of inventory withdraw would leave global oil inventories 300m barrels higher at the end of 2022 than they were at the end of 2019,” it concluded.
Source: Baltic Exchange