IEA cuts oil demand estimates, but eyes 'more comfortable' 2022 market

The International Energy Agency has lowered its global oil demand growth estimates for 2021 and 2022, but said the latest COVID-19 surge would not upend demand recovery and the market appeared on a "better footing" than it had been for some time.

In its monthly oil market report Dec. 14, the IEA lowered its demand growth estimates by 100,000 b/d for both 2021 and 2022, to 5.4 million b/d and 3.3 million b/d respectively, reflecting the hit to aviation resulting from the latest pandemic upsurge, but said rapid vaccination campaigns should limit the impact.

Demand for the first quarter of 2022 was lowered by 600,000 b/d to 97.9 million b/d, some 1.2 million b/d below the IEA's estimate of the pre-pandemic Q1 2019 level.

On the supply side, the IEA said output had increased by 970,000 b/d in November, led by the US.

"New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous COVID waves ... We expect demand for road transport fuels and petrochemical feedstocks to continue to post healthy growth," it said.

The demand downgrade comes after OPEC raised its own Q1 oil demand estimate on Dec. 13, saying vaccination campaigns would make the omicron COVID-19 impact "mild and short-lived".

S&P Global Platts Analytics has said it does not expect a material impact from the omicron variant on next year's demand rebound, which it estimates at 4.8 million b/d.

Speaking at a presentation event, IEA oil markets division head Toril Bosoni said jet fuel and gasoline demand were still not expected to return to pre-COVID levels in 2022, though this weakness was being offset by strong growth in petrochemical demand, with a "wave" of petrochemical plant construction in Asia progressing ahead of schedule.

IEA senior analyst Christophe Barret said the boost to demand from high gas prices causing a switch to oil in power generation had been less than expected, with little sign of this materializing in India, and Chinese power generation normalizing.

"LPG, ethane and naphtha, primarily used as feedstock for the petrochemical industry did not decline in 2020. We saw it holding relatively steady ... because of a strong increase in the production of medical equipment, protective gear, packaging and so forth," Bosoni said, estimating petrochemical demand growth at 1 million b/d in 2021 and 600,000 b/d in 2022.

Growing surplus

The IEA also highlighted the emergence of an oil supply surplus on the back of OPEC+ producers sticking with planned quota increases at their latest meeting.

It forecast a global supply surplus in December and raised its estimate of the surplus for Q1 2022 to 1.7 million b/d, from 1.1 million b/d previously.

That takes account of some OPEC countries being unable to implement output increases, with Nigerian condensate production and crude capacity expected to continue declining, the IEA said.

The IEA lowered its estimate of the expected increase in non-OPEC+ oil output in 2022 by 200,000 b/d to 1.8 million b/d, saying it had moderated its view of expected increases from Brazil and the US shale sector, but its forecast had "not materially changed," with Brazil, Canada and the US expected to produce at their highest ever annual levels in 2022.

The US increases are expected despite shale producers continuing to observe spending discipline and signs of cost inflation in the sector stemming from labor shortages and tubing shortages, the IEA said.

"As 2021 draws to a close, the oil market appears to stand on a better footing than it has for some time," the IEA said.

"The steady rise in supply combined with easing demand has considerably loosened our balances for Q1 2022... Assuming OPEC+ continues to unwind its cuts, a surplus of 1.7 million b/d could materialize in Q1 2022 and 2 million b/d in Q2 2022. If that were to happen, 2022 could indeed shape up to be more comfortable."

The IEA estimated stocks in the OECD countries had fallen by 21.2 million barrels in October, with preliminary figures showing a 23 million barrels fall in November.

"A near constant drawdown in inventories for much of the year left stocks 243 million barrels below the 2016-2020 five-year average" in October, the IEA said.