Crude oil: Recovering demand with rising supplies

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A royalty free image from the oil industry of an oil worker giving the thumbs up in front of an oil well.

By Krishna Prasad N B

In the first half of 2021, crude oil posted a strong rally owing to strict adherence to an agreement to cut oil production by OPEC (Organization of the Petroleum Exporting Countries) and their key allies including   Russia. The recovery in fuel demand on reopening of economies after COVID-19 pandemic and limited supplies pushed the crude prices to the highest level since October 2018. The members of oil cartels agreed to slowly raise supply limits as crude oil moved to a favorable pricing range for the producers and exporters.  Subsequently, the prices retreated from the two-and-a-half-year high. 

NYMEX WTI Crude oil gained nearly 60 percent in the first half of this year and later surged to more than USD 75 per barrel.  In the meantime, the north seas Brent crude trade which traded in ICE gained around 50    percent narrowing the spread with WTI variant.  In the domestic futures market, crude oil prices gained more than Rs 2000 per barrel.

The global economies are undergoing a post pandemic recovery led by vaccination boosts and various government policy supports. International Monetary Fund (IMF), in its latest forecast, said that the gross domestic product (GDP) growth is expected to be 6 percent for the global economy for 2021 and 4.9      percent in 2022. United States, the key player in the crude oil market, had seen its economic output in the recent quarter eclipse its pre-pandemic high. US economic activity continues to rise after reaching multiyear lows in the second quarter of 2020. Meanwhile, the second top consumer of crude oil, China, grew by 7.9 percent in the second quarter compared to the same period last year, overall GDP increased by 12.7 percent through the first half of 2021. However, new virus outbreaks along with tepid manufacturing activity and high raw material costs continue to weigh on the recovery momentum.

Among other crude oil consumers, the Indian economy witnessed a contraction of 7.3 percent in 2020-21, its first full-year contraction in the last four decades. The Reserve Bank of India projected the growth rate at 9.5 percent for 2021-22 on recovery in economic activity on rising vaccination.

 OPEC+ Production

In 2020, global oil demand recorded a drop of 9.7 million barrel per day due to Covid-19 pandemic lockdowns. In an effort to tackle the price slump, the producers’ group OPEC and allies agreed to extend its production cut that has been in operation since January 2017 to reduce the supply glut. In addition to this, the oil cartel had come out with a production cut of 9.7 million bpd  in May 2020 as a major step, however,  improved market sentiments let the producers’ group scale back production to 7.7 million bpd in August and to 7.2 million bpd from January 2021.

Besides, Saudi Arabia, the de facto OPEC leader, pledged voluntary cuts of 1 million bpd for February and March and its extension of an additional one month along with greater compliance adherence by the group further boosted the sentiments. Increased pressure among the group to tap the recent price hikes prompted OPEC+ in July to ease production cuts by 400,000 barrels per day from August 2021 onwards. This agreement also included adjustment to baseline crude production level of some OPEC+ members, including Saudi Arabia, Russia and the United Arab Emirates and this is to take effect in May 2022. As a result, supplies started to increase from July, which included the full reversal of Saudi Arabia’s voluntarily initiated cuts from peak pandemic days.

Global Demand and Supply

The energy market watcher IEA (International Energy Agency) reported that the global oil demand is set to return to pre-pandemic levels by the end of 2022.  The demand is expected to rise by 5.4 million bpd in 2021. A further 3.1 million bpd increase is expected in 2022, where 1.3 million bpd growth from OECD and 1.8     million bpd growth from non-OECD countries.

The oil supply is expected to rise at a faster pace in 2022. Outside the OPEC+ alliance, the major oil producer US, is expected to add 1.6 million bpd next year. That leaves room for OPEC+ to boost crude oil production by 1.4 million bpd above its July 2021-March 2022 target to meet demand growth. In 2021, oil output from non-OPEC+ is set to rise 0.71 million bpd, while total oil supply from OPEC+ could increase by 0.8    million bpd if the oil cartel adheres to its existing policy.

US crude oil production is likely to slip by 160,000 bpd in 2021 to 11.12 million bpd, according to latest report from the US Energy Information Administration (EIA). The price recovery after peak pandemic improved the drilling activities and this lifted total the US rig count to more than double since falling to a record low in August last year. US shale oil output hit an all-time annual high of 12.3 million bpd in 2019, before the coronavirus pandemic hit the demand. Meanwhile, US crude oil exports reached a record high in 2020 and continue to be steady in 2021 after the US government lifted the export restriction in 2013 on minimally processed ultra-light oil.  US remained a net importer of crude oil in 2020,  importing nearly 5.88 million bpd and exporting about 3.18 million bpd.  US shale oil production is expected to rise to 8.1 million bpd in September, the highest since April 2020.

The world’s biggest importer, China, in the first seven months of this year, took in 301.83 million tonnes, or 10.39 million bpd, down 5.6 percent from the corresponding period last year. Crude imports rebounded in July from a six-month low as state-backed refiners stepped up output after returning from maintenance, though independent refineries shortened restocking amid probes by Beijing into trading and taxes. China’s oil refining slumped to the lowest level in 14-months as a result of that. Daily crude processing fell below 14 million barrels a day in July for the first time, and to the least since May 2020 according to Bloomberg.

India’s crude oil imports continue to fall until June, reaching an eight-month low 3.9 million bpd.  Indian demand was distorted by the impact of persisting Delta variant and refinery maintenance. Crude oil inflows declined by 0.2 million bpd or by 5 percent compared to the month earlier.  Whereas the imports rose by 0.5 million bpd or more than 16 percent from a year ago.

Steady growth in oil demand as well as in production is expected through the rest of 2021 and 2022.  Increased demand in the next year is expected to be met by higher supplies as it gives space for OPEC+ alliance to increase the strategic limit.  Crude oil prices are expected to trade steady in the upcoming quarters, while persisting Delta variants in major consumer nations continue to worry the market.

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