Oil Agencies Bet on Vaccine Win for Second-Half Demand Optimism

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Covid-19 vaccine roll-outs are going to have to stimulate travel and economic activity if stronger oil demand forecasts are to prove warranted.

The world’s three major oil agencies — the International Energy Agency, the U.S. Energy Information Administration and the Organization of Petroleum Exporting Countries —  all increased their demand estimates for 2021, based on the rapid roll-out of coronavirus vaccines, particularly in the U.S., and the improving economic outlook. But their rosier outlook is still going to take a while to materialize.

The three agencies raised their demand forecasts for the year by 150,000 to 200,000 barrels a day from those they published in March (see chart below).

Oil Agencies Bet on Vaccine Win for Second-Half Demand Optimism

For OPEC, it was the fourth successive increase in its assessment of oil demand this year, which is now 570,000 barrels a day higher than it was in December. The IEA made its second upward revision, following a much smaller one last month, though its forecast is still 220,000 barrels a day lower than it was at the end of last year. For the EIA, it was the first upward revision to its 2021 demand outlook since August, with the forecast still 510,000 barrels a day lower than it was in December.

Despite the more optimistic view of annual average demand levels this year, the outlook for the immediate future isn’t nearly so bright. OPEC and the EIA both cut their demand forecasts for the current quarter, with only the IEA taking a more positive view than it did a month ago (see chart below). 

Oil Agencies Bet on Vaccine Win for Second-Half Demand Optimism

All three are basing their improved outlooks on a stronger demand recovery in the second half of the year, driven by the rapid Covid-19 vaccine roll-out in the U.S. and a few other countries and brighter economic forecasts. But there are still large parts of the world where vaccination is only just beginning or hasn’t yet got under way. That provides a huge reservoir of potential hosts for the virus to continue to mutate in ways that may reduce the effectiveness of current vaccines. The emergence of new, vaccine-resistant variants of the coronavirus could still derail the recovery.

While road travel and domestic flights in places like the U.S. and China are rising, long-haul and even short-haul international flights are lagging. It remains far from clear whether the hoped-for boost to holiday travel will materialize over the Northern Hemisphere summer months of the third quarter, though the balance of expectations among the three agencies is clearly swinging in a more positive direction.

At first sight, the upward revision to OPEC’s forecast is a surprise. Just two weeks ago the group cut its view of 2021 demand growth ahead of the OPEC+ ministers’ meeting on April 1, reducing it from 5.9 million barrels a day to 5.6 million barrels and slashing its outlook for the current quarter. In its latest report, it has revised its demand numbers up again, with year-on-year growth now seen at 5.95 million barrels a day (see chart below).

Oil Agencies Bet on Vaccine Win for Second-Half Demand Optimism

The increase in the first quarter simply reflects a similar uplift to the producer group’s 1Q20 demand estimate, leaving year-on-year growth unchanged. For the second quarter, demand growth has been cut by 520,000 barrels a day from last month’s forecast, but it is still above where it was seen two weeks ago. But the group’s outlook for the second half of the year has become much more optimistic.

The OPEC+ group’s decision at the start of April to begin unwinding its output cuts from next month also reflects a growing optimism about the recovery in demand but, as the IEA warns, it will take many more months to achieve herd immunity, even in countries with aggressive vaccination campaigns, and if social interactions increase too quickly, local spikes in Covid-19 cases could again hit demand.

©2021 Bloomberg L.P.

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