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, says an article published in S&P Global Platts.
Increased reliance on OPEC oil supply
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.
While Libyan supply has been defying expectations to date, a recent ceasefire agreement between warring rivals is tenuous and could unravel.
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.
Chris Midgley Comments
“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 rollout of effective coronavirus vaccines has “created a wave of optimism across commodity markets despite the fundamentals being unchanged”.
“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”.
“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.”
His Views on OCEP dependence
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.
“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.”
“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.”
Price strengthening
“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.
“This will squeeze margins of existing refineries particularly if demand recovery for transportation remains sluggish.”
“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.”
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Source: S&P Global Platts
