Global oil demand will rise in 2021, but not enough to surpass 2019 levels as the coronavirus pandemic continues to weigh on transportation fuel demand, especially jet fuel, according S&P Global Platts Analytics.
"Oil demand will rebound by more than 6 million barrels b/d in 2021, but consumption is still expected to be more than 2 million b/d below that of 2019's 101.9 million b/d. Why? The global middle class - the real engine of oil demand - faces continued pressures from wealth inequality and the ongoing COVID-19 cloud," said Chris Midgley, Global Head of S&P Global Platts Analytics, on Dec. 11.
The outlook presumes a recovery in global gross domestic product (GDP), highlighted by an acceleration of growth in the second half of 2021.
The rollout of effective coronavirus vaccines has "created a wave of optimism across commodity markets despite the fundamentals being unchanged," said Midgley.
ICE front-month Brent settled at $49.97/b Dec. 11, down 28 cents on the day, but up from around $39/b at the beginning of November, driven largely by optimism surrounding the development of vaccines.
"While in the long-term we are more optimistic about a rebound of oil demand, causing us to upwardly revise our 2021 demand outlook, in the short term, we expect things to worsen, with increased second-wave lockdowns in U.S. and Europe resulting in much weaker gasoline demand across the holiday season," Midgley added.
Due to the sharp reduction in air travel, kerosene/jet fuel demand represented more than a third of the overall demand decline in 2020, about 3.1 million b/d out of total demand loss of 8.7 million b/d.
"Jet fuel will remain the laggard going forward, keeping distillate supply more in surplus through the first half and refineries operating more in gasoline-production mode," said Midgley.
"We see domestic flights improving but we don't see international flights growing," he added.
Dependence on OPEC+ supply
OPEC+ will be dominant in the beginning of the year, as U.S. shale production continues its decline until the middle of 2021, Midgley said.
Platts Analytics expects global supply to increase by more than 3 million b/d in 2021, after declining about 7 million b/d in 2020, with the gains mostly coming from the Middle East and Russia.
Saudi Arabian output is expected to rise by 800,000 b/d to reach 10.8 million b/d by year end. Russian output is forecast to grow 400,000 b/d, while output from Iraq, UAE and Kuwait is expected to grow a combined 1.2 million b/d. Libyan production is expected to rise by 700,000 b/d.
"We see an increased reliance on supply from OPEC. As that demand grows, we are going to see more Middle Eastern crude required in order to meet the demand growth," Midgley said.
Increased reliance on OPEC oil supply coming from more volatile parts of the world means the market is more vulnerable to disruption given greater geopolitical risks which could cause price spikes, Midgley added.
While Libyan supply has been defying expectations to date, a recent ceasefire agreement between warring rivals is tenuous and could unravel. And while the incoming Joe Biden administration in the US could eventually lead to softer sanctions and thus additional Iranian and Venezuelan crude, prospective incremental barrels are expected to be minimal over the next year.
Conversely, US shale oil production is expected to decline 1 million b/d in the first half of the year, before reversing that trend in July. The Biden administration is expected to be less friendly to shale by tightening drilling regulations, but that is not expected to be a factor in 2021, Midgley said.
"Sentiment is going to be a key driver next year but right now fundamentals for the oil side remain relatively bearish because of the huge amounts of stocks that have been built," Midgley said.
Prices to strengthen by end-2021
Platts Analytics expects Dated Brent oil prices to soften in the short-term to the low $40s-per-barrel area, but move back toward $50/b by the end of 2021.
However, caution is warranted, given the uncertainties regarding robust OPEC spare capacity and Covid-19 vaccine deployment
Platts Analytics expects oil prices to "struggle a bit" in the first half of the year due to the reemergence of shutdowns in March and April to stop the spread of the coronavirus.
"We feel the current price of $50/b is probably $10 higher than warranted. Oil prices are up right now but it's really on sentiment rather than fundamentals," Midgley said.
More refinery closures expected
"Refiners are going to continue to be squeezed. Demand is not growing fast enough to take up all the spare capacity in the market. And in addition we are seeing more natural gas liquids and biofuels being produced, which basically substitutes the need for refined products," said Midgley.
"Effectively, we've got about 8 million b/d – maybe 9 – of surplus capacity right now. That declines as [refined product] production increases. Say we have a rebound of about 6 million barrels next year [of demand] so that there will be a bit more of capacity build," he added.
Even assuming a rebound in the refined product demand in 2021, growth in refining capacity, largely in the Middle East and Asia, will be far larger. And the growth in biofuels and NGL supply will continue to vie for market share and weigh on crude run rates in 2021.
"This will squeeze margins of existing refineries particularly if demand recovery for transportation remains sluggish," Midgley said.
In the U.S., some refinery capacity rationalization is being reoptimized into biofuel refineries, exacerbating refining issues by replacing fossil fuels with biodiesel, sustainable aviation fuel and renewable diesel.
"Where I think we will see the next wave of consolidation will be Europe. European demand has been on a trend downwards. And obviously, the loss of jet demand helps to rebalance the shortage of distillates you have in Europe," he said.
European refineries also face competition from large Middle Eastern refineries which are starting up, as well as Nigeria's 600,000 b/d Dangote refinery which is moving closer to completion. Dangote's start-up "is a big short for Europe that disappears," Midgley said.
"So I think Europe has another wave of consolidation which is happening now. And as Dangote starts up, another a wave of consolidation," Midgley added.