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IEA: OPEC+ needs to increase supply to keep global oil markets adequately supplied

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In its monthly oil report, the International Energy Agency (IEA) has said that global oil demand is set to return to pre-pandemic levels by the end of 2022, rising by 5.4 million bpd in 2021 and by a further 3.1 million bpd next year. The OECD accounts for 1.3 million bpd of 2022 growth while non-OECD countries contribute 1.8 million bpd. Jet and kerosene demand will see the largest increase (+1.5 million bpd year-on-year), followed by gasoline (+660 000 bpd year-on-year) and gasoil/diesel (+520 000 bpd year-on-year).

World oil supply is expected to grow at a faster rate in 2022, with the US driving gains of 1.6 million bpd from producers outside the OPEC+ alliance. That leaves room for OPEC+ to boost crude oil production by 1.4 million bpd above its July 2021-March 2022 target to meet demand growth. In 2021, oil output from non-OPEC+ is set to rise 710 000 bpd, while total oil supply from OPEC+ could increase by 800 000 bpd if the bloc sticks with its existing policy.

The IEA's first detailed look at 2022 balances confirms earlier expectations that OPEC+ needs to open the taps to keep the world oil markets adequately supplied. Global oil demand will continue to recover and, in the absence of further policy changes, by end-2022 reach 100.6 million bpd. Non-OPEC+ production is also set to rise, but gains are nowhere near the levels needed to prevent further stockdraws. In April, OECD total industry stocks fell 61.3 million barrels below their 2016-2020 average. The pace at which the OPEC+ cuts can be unwound will depend not only on the success in containing the spread of the virus and demand growth but also the timing of the eventual return of Iranian barrels to the market.

Following a record decline of 8.6 million bpd in 2020, global oil demand is forecast to rebound by 5.4 million bpd in 2021 and a further 3.1 million bpd next year, to average 99.5 million bpd. By end-2022, demand should surpass pre-Covid levels. The recovery will be uneven not only amongst regions but across sectors and products. While the end of the pandemic is in sight in advanced economies, slow vaccine distribution could still jeopardise the recovery in non-OECD countries. The aviation sector will be the slowest to recover as some travel restrictions are likely to stay in place until the pandemic is brought firmly under control. Gasoline demand is also expected to lag pre-Covid levels, as continued teleworking practices and a rising share of electric and more efficient vehicles provide an offset to increased mobility. Petrochemicals will be boosted by robust demand for plastics, while global trade supports bunker demand.

Meeting the expected demand growth is unlikely to be a problem. Even after boosting oil production by around 2 million bpd over the May-July period, OPEC+ will have 6.9 million bpd of effective spare capacity. If sanctions on Iran are lifted, an additional 1.4 million bpd could be brought to market in relatively short order. As for those producers outside the alliance, output growth is set to accelerate from 700 000 bpd in 2021 to 1.6 million bpd next year. The US leads 2022 gains, adding more than 900 000 bpd to total supply, followed by Canada, Brazil and Norway. That leaves non-OPEC+ output well above 2019 levels. By contrast, even if OPEC+ producers were to fill the gap created by demand growth, the bloc’s output would still be more than 2 million bpd below the 2019 average.

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