Oil Market Report - August 2021

• Global oil demand surged by 3.8 mb/d month-on-month in June, led by increased mobility in North America and Europe. However, demand growth abruptly reversed course in July and the outlook for the remainder of 2021 has been downgraded due to the worsening progression of the pandemic and revisions to historical data. Global oil demand is now seen rising 5.3 mb/d on average, to 96.2 mb/d in 2021, and by further 3.2 mb/d in 2022.
• World oil supply rose by 1.7 mb/d in July to 96.7 mb/d after Saudi Arabia ended its extra voluntary production cut and the North Sea recovered strongly after maintenance. Global output is poised to rise further in the coming months after OPEC+ agreed a new deal to unwind its remaining curbs. Following gains of 600 kb/d this year, supply from producers outside the alliance is expected to rise by 1.7 mb/d in 2022 with the US accounting for 60% of the growth.
• The recovery in global refinery activity slowed in July as new waves of Covid-19 cut into fuel demand while margins remained under pressure. Throughputs are expected to rise marginally in August before seasonal maintenance starts. Runs in 3Q21 were reduced on demand downgrades, narrowing the increase over 2Q21 levels to 2.5 mb/d. Global refinery runs are now forecast to rise by 3.7 mb/d to 77.9 mb/d in 2021 over year ago, still 3.7 mb/d below 2019 levels.
• OECD total industry stocks fell by a large 50.3 mb in June and stood at 2 882 mb, 131.2 mb lower than the 2016 2020 average and 66 mb below the pre-Covid 2015-19 average. The Chinese implied crude balance fell for a third consecutive month, by 35.5 mb or 1.2 mb/d in June. Preliminary July data for the US, Europe and Japan show that industry stocks rose by a combined 4.2 mb. Crude oil held in short term floating storage increased by 4.5 mb to 103.6 mb in July.
• The 2Q21 crude price rally lost steam in July on fears that new Covid-19 Delta cases and weaker economic indicators could slow the oil demand recovery just as more supply hit the market. Despite big swings, North Sea Dated still rose $2.03/bbl to $74.99/bbl but fell to $70.73/bbl in early August. Backwardation only eased in August with the fall in prices.

A new OPEC+ deal struck last month will go a long way to restore market balance. The immediate boost from OPEC+ is colliding with slower demand growth and higher output from outside the alliance, stamping out lingering suggestions of a near-term supply crunch or super cycle. Oil prices offer more evidence. A recent rally has lost steam on concerns that a surge in Covid-19 cases from the Delta variant could derail the recovery just as more barrels hit the market. Brent futures slumped from a high of $76.40/bbl in early July to around $70/bbl at the time of writing.

Global oil demand estimates have been revised lower since last month’s Report, in part due to the inclusion of more complete historical annual statistics. Our forecast for global oil demand growth is largely unchanged, however, rising 5.3 mb/d in 2021 and a further 3.2 mb/d next year. Growth for the second half of 2021 has been downgraded more sharply, as new Covid-19 restrictions imposed in several major oil consuming countries, particularly in Asia, look set to reduce mobility and oil use.

Meanwhile, global oil supply is ramping up fast. In July, producers boosted output by 1.7 mb/d, as Saudi Arabia ended voluntary curbs and the North Sea bounced back from maintenance. Supply is expected to rise further after the producer bloc agreed a deal on 18 July that aims to raise production by 400 kb/d a month from August until the remaining cuts are phased out.

Global oil inventories have been falling sharply, and in June, OECD industry stocks plunged by a hefty 50 mb, or 1.7 mb/d, to stand 131 mb below the five-year average. Stock draws could persist for the remainder of the year assuming sanctions continue to shut in Iranian crude. Based on our current balances, OPEC+ looks set to pump about 200 kb/d below the call on its crude during the last quarter of 2021, compared with a deficit of up to 2 mb/d expected earlier.

But the scale could tilt back to surplus in 2022 if OPEC+ continues to undo its cuts and producers not taking part in the deal ramp up in response to higher prices. Following a modest increase of 600 kb/d on average in 2021, supply from outside the group is forecast to expand by 1.7 mb/d next year, of which the US will account for nearly 60%. OPEC+ can still pause, continue or even reverse its curbs as required by the market and it looks unlikely that the unwinding of cuts will continue on a linear trajectory in 2022.

It’s not just the oil market that needs to be brought into balance. The world oil industry is struggling to find new business models to navigate the energy transition as outlined in the IEA’s Net Zero by 2050 Roadmap while still meeting sustained oil demand. The recent UN Intergovernmental Panel on Climate Change (IPCC) report reconfirms the urgent need for greenhouse gas reductions. It is vital to tackle these challenges as swiftly as possible to ensure an orderly path to a carbon neutral world.