Crude demand lower on Q1 lockdowns, OPEC+ gains depend on US producers

LONDON (ICIS)–The crude oil market has started 2021 with prices strengthening but the demand outlook subdued, as the latest European lockdowns attempt to contain the spread of the pandemic, the International Energy Agency (IEA) said on Tuesday.

Prices have been propped up by OPEC+ countries’, led by Saudi Arabia and Russia, adherence to their agreement to curtail output; Saudi Arabia alone said it would reduce its production by 1m bbl/day in February and March.

While economic growth is expected to speed up in the second half of 2021 as vaccine roll-outs become widespread, the Paris-based body has downgraded its crude demand outlook for the first quarter.

The IEA said that, if US shale producers decide not to increase output this year, the OPEC+ could recover some of the market share it lost in the past year while the US shale industry boomed.

Crude oil international reference Brent was trading at $55.36/bbl in Tuesday’s  European morning session; Brent touched pandemic lows at the end of April 2020 at around $20/bbl.

PANDEMIC HITS, AGAIN
Before any recovery in demand for crude oil, several major countries in Europe entered 2021 with restrictions to movement that are denting demand for fuels.

The pandemic’s latest twist saw a new strain detected in the UK in December which transmits much faster, putting the country’s health services under severe pressure as hospitalisations are nearly double those of April 2020 during the first wave.

Other countries like Germany, France, Italy and Spain have also imposed lockdown measures as cases are rising fast, attributed to social mixing over the Christmas period and, potentially, the new strain.

Elsewhere, another new strain of coronavirus in Brazil has also put the country’s health services on alert, and restrictive measures could be implemented if the situation becomes out of hand.

In China, cases have risen in past weeks, so measures to curtail social mobility in some provinces over the Lunar New Year are being mulled.

Due to the European restrictions and potentially those elsewhere, the IEA said it was downgrading its crude demand forecast for Q1, down by 600,000 bbl/day. For 2021, demand is now expected to be 300,000 bbl/day lower than the IEA’s last forecast in December.

On average, crude demand is now expected in 2021 at 96.6m bbl/day, up 5.5m bbl/day from 2020.

“Global oil markets, battered by Covid-19, opened the New Year with a price rally gathering pace … The global vaccine rollout is putting fundamentals on a stronger trajectory for the year, with both supply and demand shifting back into growth mode following 2020’s unprecedented collapse,” said IEA.

“But it will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales … World oil demand is now expected to rise by 5.5m bbl/day this year, following 2020’s 8.8m bbl/day contraction.”

Despite this expected lower demand, OPEC+ cuts could continue helping to rebalance global markets, which during 2020 registered high stocks as demand plummeted.

The IEA said that assuming OPEC+ achieves 100% compliance with the latest agreement, global oil stocks could draw by 100m bbl during the first quarter of 2021, or 1.1m bbl/day, “with the potential for much steeper declines” in the second half of the year as the recovery gains pace.

OPEC+ MARKET SHARE
OPEC+ cuts were intended to mostly draw stocks and prop up prices, but its dominance over the world’s crude markets has been dwindling as the US become a key global producer, with output at levels near those of Saudi Arabia.

But in 2020 US producers sharply reduced their output as the pandemic hit the country hard, leaving some space for OPEC+ to recover market share.

Whether US producers decide to increase output in tandem with rising prices remains to be seen; other priorities, said IEA, could keep US output lower than pre-pandemic levels.

“For now, though, companies seem committed to pledges made to keep production flat and instead use any price gain to pay down debt or to boost investor returns,” said IEA.

“If they stick to those plans, OPEC+ may start to reclaim the market share it has steadily lost to the US and others since 2016.”

Front page picture: Oil tankers load crude oil at Iraq’s Al-Basra Offshore Terminal
Source: Nabil al-Jurani/AP/Shutterstock