IEA sees tighter oil market despite demand caution, modest supply optimism

London — The International Energy Agency on Feb. 11 pointed to a tightening oil market this year, despite lowering its estimate of the recovery in global oil demand this year and seeing improving non-OPEC supply growth.

The Paris-based agency predicts global oil demand will grow by 5.4 million b/d in 2021 to reach 96.4 million b/d, noting this would be around 60% of the volume lost to the pandemic in 2020.

This is the fourth straight month the IEA has lowered its demand outlook given the challenges the world is having in reining in COVID-19, as it shifted its optimism to the second half of the year.

"A more positive global economic outlook and the start of large-scale vaccination campaigns in much of the developed world will reinforce stronger oil demand growth in the second half of the year," the agency said, citing the International Monetary Fund's improved outlook for the global economy.

S&P Global Platts Analytics takes a more sanguine view, predicting global oil demand will grow by 6.1 million b/d after a contraction of 8.8 million b/d in 2020 as it sees an even quicker recovery.

Modest supply optimism

The IEA noted that outside of OPEC, producers are responding to higher oil prices, "albeit cautiously and from a low level," citing the US shale patch and the Permian Basin, with US drilling and completion rates having increased steadily in recent months.

"At current prices, there is clearly potential for some producers to respect those engagements and modestly increase their capital expenditures," the agency said, even if "operators will stick to financial discipline and reward shareholders in 2021."

Platts Analytics believes US supply will start to turn higher by mid-2021. "Some small to large cap E&Ps are increasing drilling with higher oil prices while majors appear more conservative. Still, we continue to believe the US shale industry will observe capital discipline in 2021," Platts Analytics said in a research note.

The IEA sees US crude supply holding steady at around 11.2 million b/d after falling 940,000 b/d last year, while Canada is now pumping at record rates and Brazil, Norway and Guyana are continuing along their growth trajectories.

Total non-OPEC+ supply will rise by 830,000 b/d in 2021 compared with a decline of 1.3 million b/d in 2020, the IEA added.

OPEC opportunity

With OPEC+ affirming its readiness to help eliminate the massive oil stock overhang that built up last year, inventories have been steadily declining since the second half of last year. Saudi Arabia has promised to cut an extra 1 million b/d this month and next to help the cause.

While the IEA notes at end-December OECD stocks were still 140 million barrels above their five-year average, OECD industry stocks still fell for the fifth month in a row.

Indeed, the IEA anticipates a "rapid stock draw" in the second half of the year, which it says "sets the stage" for OPEC+ to start unwinding from its production cut deal "even if producers outside the group ramp up faster than currently projected."

The agency said that global oil output could rise by more than 1.6 million b/d in 2021 provided those outside OPEC+ pump more, OPEC+ continues to ease its record cuts of 2020 and Libya sustains its recovery.