London — Faster oil market rebalancing could present OPEC and other producers with an opportunity to ramp production in 2021, the International Energy Agency said in its latest monthly report, as it revised up its demand expectations for 2020 and signalled ongoing supply weakness in US shale.
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The IEA predicts oil demand will grow 3 million b/d more than supply in 2021, as it released its first estimates for next year in its June 16 outlook, which would mean shifting some of the huge stock overhang that has built up.
The Paris-based agency gave some glimmers of optimism around demand, seeing growth of 5.7 million b/d next year and revising up its expectations by almost 500,000 b/d for 2020, predicting a decline of 8.1 million b/d. But even with the bounce back that still puts demand at 97.4 million b/d, its nearly 2.4 million b/d below 2019.
The IEA's improved tone stems in part from improved mobility trends more broadly, particularly in demand powerhouses China and India and noting an easing of lockdown measures in many countries in the second half of the year is likely to provide a boost.
"While the oil market remains fragile, the recent modest recovery in prices suggests that the first half of 2020 is ending on a more optimistic note," the IEA said in its introduction. "New data show that demand destruction in the early part of the year was slightly less than expected, although still unprecedented," the IEA added.
The biggest drag on oil demand is set to be from the aviation sector that will last well into 2022. Jet/kerosene demand will drop by 3 million b/d in 2020, before rebounding by just 1 million b/d in 2021, leaving it short of pre-crisis levels, the IEA states.
The agency warned that "going into 2021, jet fuel demand will depend heavily on the containment of the virus, which is unlikely to be completely achieved until a vaccine is found and widely administered," which could take up to 18 months.
The IEA noted that global oil supply plunged by 11.8 million b/d in May, driven by a record OPEC+ cut and economic shut-ins in the US, Canada and elsewhere. OPEC and its allies have extended its deep production cut of close to 10 million b/d through July, while continued oil price weakness has also weighed on supply.
Saudi Arabia led May's decline in global oil production to 88.8 million b/d, the IEA noted, with the Kingdom removing 3.7 million b/d. The IEA also found Russia cut by 1.95 million b/d and the UAE reined in 1.5 million b/d. The US shut in an estimated 1.5 million b/d.
Global oil output will remain above that of demand still in 2020, dropping by 7.2 million b/d in 2020, the IEA estimates. In 2021, oil output is set to limp back to life with a 1.7 million b/d recovery, "assuming OPEC+ cuts ease, Norway, Brazil and Guyana deliver solid gains and Libya manages to sustain a rebound."
The IEA's prediction contains many caveats given OPEC+'s ongoing market management strategy as had many about-turns, while Libya's civil strife means it remains a potential 1 million b/d wildcard.
The agency is also downbeat on the speed of any revival in US output, predicting supply tumbling 900,000 b/d this year and dropping 300,000 b/d in 2021 unless prices recover to a level that injects fresh life into the shale patch.