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IEA revises downwards 2021 oil demand

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Oilfield Technology,

The International Energy Agency (IEA) has said that it expects global oil demand to recover by 5.5 million bpd to 96.6 million bpd in 2021, following an unprecedented collapse of 8.8 million bpd in 2020. For now, a resurgence in Covid-19 cases is slowing the rebound, but a widespread vaccination effort and an acceleration in economic activity is expected to spur stronger growth in the second half of the year.

After falling by a record 6.6 million bpd in 2020, world oil supply is set to rise by over 1 million bpd this year, with OPEC+ adding more than those outside the bloc. There may be scope for higher growth given the IEA's expectations for further improvement in demand in 2H21. After holding flat at 92.8 million bpd in December, global supply is rising this month with OPEC+ due to ramp up during January.

Global refinery throughput is expected to rebound by 4.5 million bpd in 2021, after a 7.3 million bpd drop in 2020. Runs rose by 2.6 million bpd in November, the largest monthly gain in seven years, as refiners returned from peak maintenance. A cold snap in Europe and Asia boosted diesel and kerosene, but higher crude oil prices led fuel oil cracks lower, with an overall negative impact on refinery margins.

Observed global oil stocks fell by 2.58 million bpd in 4Q20 after preliminary data showed hefty draw downs towards year-end. In November, OECD industry stocks fell for a fourth consecutive month. A monthly decline of 23.6 million bbl (0.79 million bpd) left inventories at 3 108 million bbl, 166.7 million bbl above their five-year average. Products led the fall, with OECD industry crude stocks only 48.9 million bbl below a May-peak.

Oil’s rally accelerated, with Brent reaching US$57/bbl on 12 January, a level not seen since February 2020. Despite rising Covid cases, crude prices are well supported by financial, economic and market fundamentals. Crude prices flipped into backwardation in December, and the 12 month time spread deepened to US$2.50/bbl by mid-January. Freight rates fell after OPEC+ agreed cuts on 5 January.

Global oil markets, battered by Covid-19, opened the New Year with a price rally gathering pace. Brent rose to US$57/bbl and WTI to US$53/bbl, reflecting a boost in demand on a cold-snap in Europe and Asia and OPEC+ supply cuts that look set to keep markets in deficit. The global vaccine roll-out is putting fundamentals on a stronger trajectory for the year, with both supply and demand shifting back into growth mode following 2020’s unprecedented collapse.

But it will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales. This has contributed to the IEA revising down its forecast for global oil demand by 0.6 million bpd for 1Q21 and 0.3 million bpd for 2021 as a whole. World oil demand is now expected to rise by 5.5 million bpd this year, following 2020’s 8.8 million bpd contraction. This recovery mainly reflects the impact of fiscal and monetary support packages as well as the effectiveness of steps to resolve the pandemic.

Anticipating weaker demand, OPEC+ decided in January to delay a further easing of cuts and Saudi Arabia surprised with an additional 1 million bpd supply reduction in February and March. The group’s more proactive production restraint looks set to hasten a drawdown in the global stock surplus that got underway in earnest during 3Q20. Assuming OPEC+ achieves 100% compliance with the latest agreement, global oil stocks could draw by 1.1 million bpd, or 100 mb, in 1Q21, with the potential for much steeper declines during the second half of the year as demand strengthens.

Higher demand will allow supply to start rising this year. World oil supply is now expected to increase by 1.2 million bpd in 2021 following a record decline of 6.6 million bpd last year. Much more oil is likely to be required, given the iEA's forecast for a substantial improvement in demand in the second half of the year. The IEA's balances assume that during 2H21, OPEC+ will still withhold 5.8 million bpd of oil from the market as per the group’s April 2020 agreement. However, OPEC+ has taken a more flexible approach to market management and will meet monthly to decide on output levels.

Higher crude prices could also provide an incentive to increase production by the US shale industry, which saw the biggest fall in output last year. For now though, companies seem committed to pledges made to keep production flat and instead use any price gain to pay down debt or to boost investor returns. If they stick to those plans, OPEC+ may start to reclaim the market share it has steadily lost to the US and others since 2016.

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