IEA cuts 2021 oil demand recovery estimate on lockdowns, vaccination challenge

The International Energy Agency on Jan. 19 cut its estimate of the recovery in global oil demand this year, citing renewed COVID-19 lockdowns and the scale of the global vaccination challenge.

In its monthly oil market report, the IEA said worldwide vaccination efforts were only likely to improve demand for transport and mobility fuels in the second half of the year.

Its new forecast of a 5.5 million b/d recovery in demand this year is 240,000 b/d lower than last month's forecast.

Its overall figure for 2021 oil demand is now 96.64 million b/d, down from 96.91 million b/d in last month's report, the largest in a succession of downward revisions, which have totaled 780,000 b/d since last June.

The IEA forecast US oil demand to fall back by 300,000 b/d in the first quarter of 2021 from Q4 2020 levels, to 18.26 million b/d, before a jump of 600,000 b/d in the second quarter.

The IEA also lowered its estimate of China's oil demand growth this year by 90,000 b/d to 750,000 b/d, putting China's 2021 demand at 14.65 million b/d -- still nearly 1 million b/d higher than the 2019 level.

"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... But it will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales," the IEA said.

"Border closures, social distancing measures and shutdowns, among other policies, will continue to constrain fuel demand until vaccines are more widely distributed, most likely only by the second half of the year."

It accordingly lowered its estimate of the "call" on OPEC crude, or demand for OPEC production, this year by 300,000 b/d to 27.7 million b/d.

S&P Global Platts Analytics in December forecast global demand would rise by 6.3 million b/d in 2021 to 99.6 million b/d, with OPEC making up lost ground, increasing its crude output by 2.6 million b/d, while non-OPEC oil supply rises by just 1.2 million b/d.

OPEC in its own monthly oil market report last week slightly raised its oil demand forecast for 2021 to 95.91 million from 95.89 million b/d, a 5.9 million b/d recovery from 2020.

Supply shift

On the supply side, the IEA slightly increased its estimate of US oil output this year on the back of higher prices and a tighter market, by 180,000 b/d to 16.24 million b/d, including condensates and natural gas liquids, but this still leaves US output some 300,000 b/d below 2020 levels and 900,000 b/d below 2019 levels.

Promises by major US producers that they will maintain spending cuts implemented in response to last year's price crash provide hope for a boost to the market share of OPEC+ producers, including Russia, which last year saw its oil output drop to the lowest level since 2011, the IEA said. It estimated the market share of OPEC+ producers had fallen to 51% last year, from 57% in 2016.

With the imminent arrival of a new US administration raising Iran's hopes of an easing of sanctions, the IEA said Iranian crude output had hit a 34-year low of 1.98 million b/d last year.

"Our assumptions show OPEC+ output rising by 670,000 b/d this year (based on 100% compliance with its current supply agreements), while producers outside the bloc increase by 560,000 b/d year on year," the IEA said. "We have assumed a gradual easing of cuts during Q2 2021 to a reduction of 5.8 million b/d (versus the October 2018 reference), which it holds through Q2 2022 as per the group's April 2020 agreement. In that case, OPEC+ market share edges above the 2020 level."

As for the price outlook, "despite rising COVID cases, crude prices are well supported by financial, economic and market fundamentals," it said. "Crude prices flipped into backwardation in December, and the 12-month time spread deepened to $2.50/b by mid-January."

Stocks

The report confirmed a fall in industry oil stocks in the OECD nations from a peak of 3.22 billion barrels last July, with levels falling over the four months to November, and the drop intensifying in December according to preliminary data. Stock levels fell by 23.6 million barrels in November to 3.11 billion barrels at the end of the month.

That put the overhang compared with the five-year average at 168 million barrels, down from a 256 million barrel overhang back in July. Such levels contrast with the minimal overhang achieved around 2018 in the wake of the OPEC+ production accord, but are not as high as in the years running up to the accord being sealed in 2016.