Oil Market Forecast

This August edition of our Oil Market Forecast comes as some of this year’s optimism about an oil market recovery appears to be draining away. The world seems, once again, to be facing a surge in COVID-19 cases and a return of the travel restrictions and lockdowns that for a time this year at least, looked as if they were behind us.

A few key points:

The IEA (1) reported a stronger than expected surge in oil demand in June, with their estimate jumping by 3.8 MMbbl/day over May levels to 97.4 MMbbl/day. The IEA signaled that their demand forecasts for July would be flat at best and could even see a decline. Demand forecasts for the second half of the year have become increasingly mixed over the last month due to concerns about the resurgence of COVID-19, particularly in China (2). During the first COVID wave, China and several other south east Asian countries responded by imposing lockdowns and closing their borders. This response was very effective in halting the spread of the disease, but it is unclear whether this approach will be as effective with the delta variant. The IEA have revised their 2021 demand figure down by 300,000 bbl/day to 96.2 MMbbl/day, leaving their 2022 estimate unchanged. OPEC (3) have held their demand estimates for both 2021 and 2022 steady, at 96.6 MMbbl/day in 2021 and 99.9 MMbbl/day in 2022 respectively. The EIA (4) have maintained their 2021 demand estimate at 97.6 MMbbl/day but revised their 2022 estimate down by 100,000 bbl/day. While it is hard to predict the impact of the spread of the delta variant on oil markets, the outlook does seem to be dimmer than a month ago.

The IEA reported global crude oil supply rising to 96.7 MMbbl/day in July, driven by increased OPEC supply and the expiry of Saudi Arabia’s additional voluntary production cuts. OPEC have not met since the 18th of July and are not scheduled to do so until the 1st of September. Consequently, there has been no recent update or adjustment to their production schedule. We expect supply rise by 450,000 bbl/day in August as OPEC continues to unwind its supply curbs. We have raised our US production forecast for the year, from 15.8 MMbbl/day to 16.2 MMbbl/day, based on an increase to our rig count estimate for the year, higher natural gas liquids volumes and higher conventional production.

The net effect of a reduction in second half demand and an increase in our forecast of US supply, is to narrow the oil market deficit that we have predicted through the second half of the year. The market is now almost balanced through the rest of the year as shown in Figure 1.

Figure 1 - Supply and Demand Surplus Forecast

We estimate global oil inventory drawdowns of 61 MMbbl in the first half of 2021, rising to 128 MMbbl in the second half of the year as demand recovers. This compares to our estimate of 350 MMbbl for the second half of 2021 in last month’s forecast, reflecting the impact of lower demand and an increase to our estimate of supply.

Figure 2 shows global storage capacity and inventories. If supply and demand follow the current forecast, global inventories will still be slightly above the five year average by year end, falling below the five year average in 2022, with the deficit accelerating through 2023 and 2024.

Figure 2 - Global Storage Chart

Brent and WTI spot prices have fallen sharply over the course of the last month. At the time of writing, both Brent and WTI were down more than $10/bbl from their July highs at $65.00/bbl and $62.25/bbl respectively.

The same pattern has been reflected in the futures market, with both Brent and WTI falling sharply from last month’s highs; see Figure 3 and Figure 4.

Figure 3 - Brent Crude Oil Futures

Figure 4 - WTI Crude Oil Futures

These reactions seems disproportionate to the modest downward demand revisions in the IEA’s latest oil market report; the market remains balanced by OPEC, which has the capacity to raise or lower supply by an order or magnitude more than those revisions. The market may also be responding to a further intervention by the Biden administration, which again called on OPEC to increase supply to bring prices at the pumps down (5).

The US land oil rig count continued to climb this month, jumping from 362 on the 16th of July to 388 on the 20th of August, a notably sharp rise. We expect US shale oil focused companies to maintain the financial discipline that has been the hallmark of their operations this year but have revised up our best estimate rig count for the year from 360 to 366. We expect the rig count to continue to recover in 2022, averaging 439 rigs, as debt is retired, and more capital becomes available for operations.

Figure 5 - US Land Oil Rig Count

(1) Oil Market Report – August 2021, International Energy Agency
(2) “Oil Prices Slide on Worries That Delta Variant Will Crunch Demand”, David Hodari and Amrith Ramkumar, Wall Street Journal, August 9th, 2021.
(3) “OPEC Monthly Oil Market Report”, Organization of the Petroleum Exporting Countries, August 12th, 2021.
(4) Short Term Energy Outlook (STEO), August 10th 2021, U.S. Energy Information Administration.
(5) “The White House Urges More Help from OPEC”, Jenny Leonard, Bloomberg, August 11th, 2021.