Oil Demand Is Headed for Record Rebound in 2021

Source: By David Hodari, Wall Street Journal • Posted: Tuesday, June 16, 2020

IEA forecasts demand in 2021 will rebound by a record 5.7 million barrels a day

Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia May 21, 2018. Photo: ahmed jadallah/Reuters

The coronavirus pandemic will hammer global growth and oil demand this year, but supply cuts from producers and a record rebound in demand next year will help to rebalance the oil market, the International Energy Agency said.

In its monthly oil-market report Tuesday, the IEA said that while the world’s demand for crude will drop by 8.1 million barrels a day this year—slightly less than forecast in last month’s report—demand in 2021 will rebound by a record 5.7 million barrels a day.

The emergence in recent weeks of parts of the global economy from coronavirus lockdowns that did unparalleled damage to global economic growth has spurred a recovery in crude demand. China’s oil demand in April was almost back at levels seen a year previously and Indian demand climbed in May.

If that resurgence persists and oil-producing nations stick to their plans to constrict global oil supply, “the market will be on a more stable footing by the end of the second half [of 2020],” the IEA said in its report.

While the decision of the Organization of the Petroleum Exporting Countries and its allies to extend their historic production cut through Julywill help speed up the oil market’s rebalancing, “we should not underestimate the enormous uncertainties,” the market still faces, the agency said.

Brent crude oil was last up 2.4% at $39.72 a barrel and front-month West Texas Intermediate futures were up 2.4% at $37.12 a barrel, rallying in line with broader markets. Both Brent and WTI are up more than 20% over the past month, although remain sharply lower this year.

The agency adjusted its June report to account for the forecast of its parent organization, the Organization for Economic Cooperation and Development, of a 6% global hit to GDP in 2020 and a rebound of 5.2% in 2021. The pace and success with which different nations will reopen their economies is still highly uncertain, the agency added.

With the worst effects of lockdown now behind many major economies, the IEA cited French Observatory of Economic Conjunctures data that show a 27% drop in global value-added transport—which accounts for half of global oil demand—during quarantine. Manufacturing, which comprises almost a quarter of the world’s energy demand, took a 30% hit, the OECD said.

While better-than-expected demand during lockdown prompted the IEA to reduce its forecast annual demand hit by 500,000 barrels a day from last month’s estimate, the nascent recovery under way for oil and oil products has been uneven and will likely remain that way, the agency said.

Stripping out jet-fuel demand, global oil demand should reach pre-crisis levels in mid-2021, the IEA’s executive director Fatih Birol said Tuesday. “The key issue is when people will start to fly,” he said, adding that “if there is a solution to the coronavirus problem and the economy rebounds as foreseen, we may well see in the near term oil demand go back to pre-crisis levels.”

Still, total oil demand might not fully recover to pre-coronavirus levels until 2023, the agency said.

A drop-off in air travel means that after falling 3 million barrels during 2020, the IEA expects demand for jet fuel and kerosene—both used in aviation—to recover by just 1 million barrels a day in 2021, leaving it well below precrisis levels.

That lopsided rally and a huge glut in inventory has caused a headache for refiners, with margins in “free fall” in May, and throughputs expected to fall by 5.4 million barrels a day in 2020, according to the IEA. Still, the agency expects the sector to recoup most of that fall next year.

Refiners aren’t the only sector of the energy market that have a huge overabundance in supply to burn through. The IEA said that OECD oil stocks rose 4.9 million barrels a day in April to 3.1 billion barrels, an amount that will only have added to the “incredible” 90 days of forward-demand coverage the agency cited in its report last month.

In addition, U.S. inventories remained at record highs in early June, having built by a million barrels a day so far this year.

 Still, the amount of oil being stored at considerable expense on tankers at sea—a last resort during the oil-price rout in April—began to fall in May, although remained a few million barrels off its record highs. Data collected by the IEA show that the global oil storage build that accelerated through the first months of the year is expected to go into reverse in June.

Cuts from the ‘OPEC plus’ group—the cartel cut 9.4 million barrels of supply between April and May—and forecasts that U.S. production will fall 900,000 barrels a day this year and 300,000 barrels a day next year will help that draw, the IEA said.