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Global oil demand rebound seen eclipsing India, Iran uncertainty

Highlights

Summer oil demand seen rebounding over 8 million b/d

US land mobility hits post-lockdown high

India's COVID crisis still hanging over oil markets

The global oil market remains set to tighten in the coming months as a demand-driven rebound from the pandemic dwarfs the ongoing crisis in India and outstrips the potential for a quick return of Iran's oil, according to market watchers.

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With mobility rapidly recovering in the US and Europe as lockdown restrictions ease and a seasonal upswing expected in transportation and industry activity, the world should see a major oil demand surge over the summer, oil market analysts believe.

Land-based mobility, a key proxy for gasoline and diesel demand, shows many of the world's biggest economies are returning to more normal consumption levels.

US mobility recovered to 16% below pre-pandemic levels last week, according to Google data, the highest since March 18, 2020. Europe's top five economies are also rebounding from a wave of early April lockdowns, the data shows. Even Brazil, which suffered its deadliest episode of the pandemic in March, has seen activity recover sharply in recent weeks.

In China, the world's second-biggest oil consumer, oil demand has already reached pre-pandemic levels, and growth prospects this year remain solid after strict, early containment measures paid off.

S&P Global Platts Analytics expects global oil demand to surge by 8.2 million b/d from May to August led by a jump in US gasoline volumes as activity continues to rebound in the world's biggest economy. While heavy transport-based diesel demand has remained more resilient to the pandemic, a slow return to global aviation means jet demand will likely remain close to 1 million b/d below pre-pandemic levels by year-end, Platts Analytics forecasts.

Click to view full size infographic

Iran sanctions

At the same time, however, oil markets are second-guessing the impact of an expected lifting of US sanctions on Iran this year as talks continue to reinstate the UN-backed nuclear deal. With Iran sitting on some 1.5 million b/d of sidelined production capacity, speculation of a prompt return to the market of Iran's oil has dented the global oil price in recent days. Brent futures stood at around $67.30/b in midday European trading May 24, up from a dip below $65/b on May 21 but down from breaching $70/b on May 18.

But, even if additional supplies from Iran start to hit the market from July, Goldman Sachs said it would only delay rather than sink its forecast for spot Brent hitting $80/b during the third quarter of 2021 as demand recovers.

"The case for higher oil prices remains intact given the large vaccine-driven increase in demand in the face of inelastic supply," Goldman's oil analysts said in May 23 note. "This leaves the path to higher prices as the key uncertainty," it said adding a July restart in Iran exports would only delay its Brent price forecast by one quarter.

Japan's MUFG is also bullish on the oil price momentum in the coming months on the basis that additional Iranian supplies will not disrupt the swift demand-led market rebalancing.

"We expect a significant ramp-up in global oil demand in the next six months, owing to both vaccines and mobility trends increasingly becoming more resilient to virus waves. This is central to our thesis as to why we expect oil prices to 'overshoot' in Q2," the bank said in a May 20 note adding it sees Brent 'in the $70/b' over the summer.

Indian spike

Meanwhile, lingering demand-side concerns continue to focus on surging infections in India, the world's No. 3 oil consumer. Land-based mobility slumped to 57% below pre-pandemic levels in the week to May 20, according to Google data, marking a 12-month low. The mobility collapse marks a dramatic turnaround for the Asian powerhouse after activity recovered to only 12% below pre-pandemic levels in March earlier. Elsewhere in Asia, tighter restrictions in Japan to curb a spike in infections saw mobility dip sharply in early May.

But most market watchers expect activity levels in the countries to turn a corner in the coming weeks and months as the pace of vaccinations accelerate and fears ease that mutant strains will sidestep their efficacy.

Platts Analytics sees India's oil demand in the second half of the year some 700,000 b/d higher than the first driven by "a more broad-based pickup in economic activity amid widening vaccination rollout."

Goldman said the mobility recovery in the West is "on track to exceed our expectations", helping to offset the recent hit to activity in India.

With global oil fundamentals tightening, Platts Analytics expects Brent prices to break above $70/b again during summer before easing later in 2021.