The Data Showing Why OPEC+ Could Keep Oil Supply Curbed

(Bloomberg) -- Oil  stockpiles may be coming down, but the world’s big producers can’t afford to relax their hold on production for a while yet. The recovery this year will return less than two-thirds of oil demand lost in 2020 and output restraint will be needed for many months to come.

The world’s three major oil agencies — the International Energy Agency, the U.S. Energy Information Administration and the Organization of Petroleum Exporting Countries — are moving toward to a consensus that sees year-on-year global oil demand growth in 2021 at somewhere near 5.5 million barrels a day, close to where the IEA pegged it when it first began publishing detailed forecasts for the year, back in July.

At that time, its view looked pessimistic, with the agency seeing growth about 1.5 million barrels a day lower than its counterparts, but the EIA and OPEC have repeatedly trimmed their forecasts since then (see chart below). 

Despite the boost given to winter demand from cold temperatures across much of the Northern Hemisphere and accelerating economic activity as vaccines are rolled out, earlier forecasts of strong demand growth in the first quarter of the year have fizzled out. All three agencies now see global oil demand in the current quarter little changed from the same period last year, just before the pandemic really hit oil consumption.

Not surprisingly, demand is set to show strong year-on-year growth in the second quarter. But, despite an increase of about 12 million barrels a day, the recovery would still only return about three-quarters of the demand that was lost in the same period last year. In the third quarter, the three agencies see between 60% and 65% of last year’s losses restored. That range widens to between 60% and 75% in the fourth quarter.

On the supply side, the agencies are moving in different directions. While the IEA and EIA slashed their forecasts of first-quarter non-OPEC production by more than 500,000 barrels a day, as a result of the impact of Winter Storm Uri on U.S. output, OPEC raised its assessment by 230,000 barrels a day.

Looking at 2021 as a whole, though, it is the IEA that is out of step with its peers. It’s alone among the three in seeing no response from the U.S. shale sector to the increases in oil prices that have taken WTI crude futures above $60 a barrel all the way to the end of the year. The EIA has raised its forecast of non-OPEC supply in the second half of 2021 by almost 500,000 barrels a day, while OPEC has increased its outlook by an even bigger amount. Both see producers in the U.S. shale patch responding to higher prices with more investment and increased output.

This leaves only the IEA revising higher its forecast of the world’s need for OPEC crude this year. It currently pegs it at 27.32 million barrels a day, up by 210,000 barrels a day from last month’s forecast. In contrast, the EIA has cut its estimate of how much crude the producer group needs to pump to balance supply and demand by 310,000 barrels a day to 27.23 million barrels, while OPEC has cut its forecast by 25,000 barrels a day to 27.26 million. 

But the producer group doesn’t want to balance supply and demand, it wants excess stockpiles built up during the pandemic to be drawn down, so it’s no surprise that the group’s output is running about 2.4 million barrels a day below that level, or that Saudi Arabia has decided to prolong its voluntary additional output cuts at least to the end of April.

And stockpiles are coming down, all three agencies agree on that. OECD commercial oil stockpiles fell by 14.2 million barrels, or 0.5 million barrels a day in January, according  to the IEA. Global stockpiles are set to drop at a rate of 1.2 million barrels a day this quarter, if OPEC keeps its production at last month’s level of 24.75 million barrels a day, the agency’s forecast shows.

The producer group will be able to raise production in the second half of the year, while still forcing oil out of stockpiles. With production kept at February’s level of about 24.8 million barrels a day, global oil stockpiles would fall at a rate of between 2.5 million and 3.2 million barrels a day in the third quarter, rising to between 2.75 million and 4.6 million barrels a day in the final quarter, as demand picks up.

That will give OPEC some room to ease output targets in the months ahead, but perhaps not as much as it would like, with its members currently holding as much as 7.7 million barrels a day of potential production off the market.

©2021 Bloomberg L.P.