Oil Glut Returns to Near Pre-Pandemic Levels

Source: By David Hodari, Wall Street Journal • Posted: Wednesday, May 12, 2021

IEA cuts global demand growth forecast as India battles Covid-19 wave

A pumpjack near Crane, Texas. Photo: Daniel Acker/Bloomberg News

The oil supply glut that built up after the pandemic forced producing countries to slash output has almost returned to normal levels, the International Energy Agency said Wednesday.

But in its monthly report, the IEA cut its 2021 global demand growth forecast by 270,000 barrels to 5.4 million barrels a day. Demand in Europe and the Americas in the first quarter was weaker than previously thought, the IEA said. The agency cut its second-quarter forecast for Indian demand as the country struggles with high coronavirus infection rates.

The Paris-based organization left its demand estimates for the second half of the year unchanged, adding that vaccination rollout programs, rebounding economic activity and easing transport restrictions in the U.S. and Europe clear the way for crude demand to begin outstripping supply later this year.

The agency expects demand to outstrip supply even after the Organization of the Petroleum Exporting Countries and its allies raise output. The IEA cut its already moderate supply growth forecast for non-alliance producers to roughly half the amount of last year’s contraction, while also forecasting a further drop in U.S. production in line with OPEC’s forecast this week.

The supply stocks held by the wealthy nations of the Organization for Economic Cooperation and Development slipped to 1.7 million barrels above the five-year average of 2016-20, the IEA said. “Anticipated supply growth through the rest of this year comes nowhere close to matching our forecast for significantly stronger demand beyond the second quarter,” it said.

Oil prices climbed after the IEA released its report. Brent crude, the global benchmark, rose 1.1% to $69.28 a barrel, while West Texas Intermediate futures, the U.S. gauge, were up 1.2% at $66.04 a barrel. Rystad Energy analyst Louise Dickson said traders were focusing on the IEA’s upbeat demand outlook, as well as similarly bullish forecasts from OPEC on Tuesday.

Despite the IEA’s forecast that the glut will start shrinking next month, significant risks to the agency’s outlook remain in both supply and demand.

India has been reporting more than 400,000 new coronavirus cases a day, prompting the IEA to cut its second-quarter demand forecast by 13%.

Restrictions are easing and mobility is improving in other Covid-19 problem areas like Brazil, but India’s example shows how fragile the post-pandemic economic recovery might be, the IEA said.

While the plans of OPEC and its allies to bring back millions of barrels of held-back supply in the coming months won’t derail the oil market’s tightening, the prospect of a rapprochement between the U.S. and Iran might mean millions of extra barrels of crude returning to the market, the IEA said.

Washington and Tehran are engaged in indirect negotiations to revive their nuclear deal and warmer relations might clear a path for the 2.4 million barrels Iran is currently producing to be freely traded.

Even accounting for Iranian barrels, the OPEC+ alliance would still produce 1.7 million barrels of oil a day fewer than the rate at which the world is forecast to consume it in 2021’s fourth quarter.

In line with some of the forecasts made by the agency and by OPEC over the past year, the IEA expects global oil demand to have almost returned to its pre-pandemic normal level by the end of this year. The organization expects demand in the fourth quarter to be 120,000 barrels a day fewer than it was in the same quarter of 2019.

Write to David Hodari at David.Hodari@dowjones.com