The International Energy Agency modestly cuts its oil demand estimates for 2020 and 2021 despite a recent rally in crude futures, as the looming uncertainty over the efficacy, availability, and deployment of COVID-19 vaccines, will keep oil demand weak in the short term.
The IEA, in its latest monthly oil market report published Dec. 15, said it "will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand."
But the Paris-based agency admitted that stronger Asian demand and persistent and effective OPEC+ supply management had aided the recent recovery in oil prices and on the physical oil markets.
The IEA now expects global crude oil stocks to return to pre-pandemic levels by December 2021, "as the 1.7 million b/d build in 2020 is followed by 1.8 million b/d draw in 2021."
Solid recovery
Oil demand will plunge by 8.8 million b/d in 2020, a cut of 50,000 b/d from its previous forecast, according to the report.
However, demand will grow by 5.7 million b/d in 2021 to average 97.1 million b/d, which includes a downward revision of 170,000 b/d from its previous forecast.
The IEA predicts a "solid recovery in demand" next year, which will recover nearly two-thirds of the amount lost in 2020.
The downgrade in 2021 oil demand was mainly due to the slow recovery of the aviation sector, which continues to put pressure on jet fuel/kerosene demand.
Jet fuel/kerosene will account for around 80% of the overall 3.1 million b/d shortfall in consumption in 2021 versus 2019.
"Growth in gasoline and diesel should be particularly strong and demand for both fuels is projected to return to 97-99% of their 2019 levels," the report said.
IEA said demand next year will still not fully recover to 2019 levels due to continued restrictions in OECD countries in Q1 and the tough economic situation.
The IEA said these forecasts are all on the assumption that vaccines will be introduced in OECD countries in the first quarter of next year and widely administered in Q2 and Q3.
"There remains considerable uncertainty remains about vaccines' efficacy, availability, and deployment," it said.
It also warned that a possibility of third wave of the virus in Europe and other parts of the world would bring renewed downward pressure on oil demand.
Nuanced policy
The IEA said the OPEC+ decision to take a monthly slant to its production policy is a more nuanced approach to market management.
OPEC and its allies, including Russia, agreed on Dec. 3 after a week of contentious talks to raise their aggregate crude oil production by 500,000 b/d in January and meet monthly to decide subsequent output levels.
The IEA said global stocks could draw by around 700,000 b/d in Q1 2021 if OPEC+ production cuts are adjusted higher each month from January to March.
"With Libyan production recovering swiftly and much uncertainty about the pace of the demand recovery, a bigger increase threatened to halt the gradual de-stocking we have seen in the latter months of 2020," the report said.
The IEA said the bloc "must strike a balance between boosting prices to support their budgets but not pushing them so high that US shale production can stage a strong recovery."
Global oil supply is on track to decline by 6.6 million b/d and increase by 1.4 million b/d in 2021, according to IEA's new forecast.
US production will fall by 600,000 b/d in 2020, similar to Saudi Arabia, while Russian production will drop by nearly 1 million b/d.
However, for next year, Saudi and Russian oil output would rise by 260,000 b/d and 120,000, respectively. And, US oil output is set to fall by 510,000 b/d in 2021.
Stock draws
With prices moving above $50/b for the first time since early-March, the market structure on the oil forward curves has also grown stronger.
But despite shallow backwardation, physical barrels remain close to futures prices, which underlines "the continued uncertainty that Covid-19 is causing oil demand and market stability."
But despite mixed signals, the IEA said data showed a steep stock draw of 4.16 million b/d in October, and a significant draw is expected in November, too.
Commercial OECD stocks fell in October, for the third consecutive month, to 3.13 billion barrels.
However, estimated product stock draws slow down until the next leg of the demand recovery in Q2, it said.
Refiners are once again facing a challenging environment on the seasonal slowdown of refined product demand in the northern hemisphere winter combined with tighter crude oil markets.
But refinery throughputs are likely to continue rising from October through January, before the subsequent start of the maintenance season in 1Q21.
Global refining throughput in October fell almost 1 million b/d due to maintenance shutdowns in Europe along with some brief shutdown in the US as a result of the hurricanes.
