‘Fragile’ crude market rebalancing to speed up in H2 but downside risks remain – IEA

Jonathan Lopez

11-Feb-2021

LONDON (ICIS)–Crude oil prices have risen to high last seen before the pandemic hit the global economy in the second quarter of 2020, but the supply/demand rebalancing remains “fragile”, said the International Energy Agency (IEA) on Thursday.

The downside risks for the global economy remain, although the start-up of vaccination programmes across many countries is bringing some optimism among investors, who believe the recovery will start in earnest from the second half of 2021.

But some regions, notably the EU, are vaccinating at a slower-than-expected pace, which in turn could worsen the epidemiological situation going forward and hit the economy.

But the petrochemicals subsector, however, will remain healthy globally going forward, said IEA.

Even if most regions’ mobility is set to hit the gasoline markets, feedstocks for petrochemicals production like naphtha – predominant in Europe and Asia – are set to keep healthy activity as industrial production remains healthier than sectors within the services sphere.

Crude oil futures, however, continued their rally on Thursday; by European afternoon trading, the international reference Brent was trading comfortably above the $60/bbl mark.

“Renewed lockdowns, stringent mobility restrictions and a rather slow vaccine roll-out in Europe have delayed the anticipated rebound until the second half of the year,” said IEA.

The Paris-based agency recognised the efforts by producing countries within the OPEC+ group have helped increase prices for crude futures, but it also highlighted how US and Canadian producers are pumping out crude at high rates, recovering by now many of the pandemic-induced losses in output.

Higher output from non-OPEC+ countries could put a lid to how much crude oil prices can increase.

The IEA slightly upgraded its forecast for crude demand in 2021, up by 200,000 bbl/day to 96.4m bbl/day, still sharply lower than the near 100m bbl/day registered in 2019, the last pre-pandemic full year.

But higher demand does not mean the IEA expects higher demand growth, forecast 5.4m bbl/day higher than in 2020, as stocks globally are high, contributing to the IEA’s idea of a “fragile” rebalancing.

“The forecasts for economic and oil demand growth are highly dependent on progress in distributing and administering vaccines, and the easing of travel restrictions in the world’s major economies,” it said.

“Amid the uncertain outlook for oil demand, OPEC+ has reiterated its readiness to help eliminate the massive oil stock overhang that built up last year. Inventories have been steadily declining since Q3 2020, but end-December OECD [most developed economies] stocks were still 140m bbl above their five-year average.”

A significant draw in stocks is not expected until at least the second half of 2021, said the IEA, and only then OPEC+ countries would start thinking a change in their strategy to reduce supply and prop up prices.

“That [potential draw in stocks] sets the stage for OPEC+ to start unwinding cuts even if producers outside the group to ramp up faster than currently projected,” it concluded.

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