IEA upgrades oil demand estimates on data reassessment

In its February Oil Market Report, the International Energy Agency (IEA) upgraded the absolute level of demand estimates significantly from last month’s report due to changes to its baseline estimates for Saudi Arabia and China. World oil demand in 2019 is now estimated at 100.3 million b/d, an upward revision of 770,000 b/d versus IEA’s previous data. This baseline revision is carried over the 2020-2022 period.

IEA raised its demand estimates for China for 2019 by 360,000 b/d, in the petrochemical sector. This revision considers discrepancies in refinery inputs and reported product outputs in annual statistics. IEA has also adjusted estimates for Saudi Arabia’s LPG consumption up by around 500,000 b/d.

“More complete information now available and new methodologies for capturing data continue to shed light on areas not well covered in official statistics…together, these revisions result in a tighter balance than previously reported, more aligned with available data for oil stocks and already reflected in the oil price and forward structure,” IEA said.

While the revisions lift baseline demand, growth rates are largely unchanged. World oil demand is set to expand by 3.2 million b/d this year, to reach 100.6 million b/d, as restrictions to contain the spread of COVID-19 ease, releasing pent-up demand. The milder-than-expected negative impact of the Omicron variant on demand has been largely offset by additional consumption stemming from a cold snap in the US and a continued switch to oil from gas in some industrial sectors.

World oil production rose 560,000 b/d to 98.7 million b/d in January, with non-OPEC+ producers delivering 70% of the increase while the OPEC+ alliance continued to pump far below target levels.

“The (OPEC+) group’s persistent supply shortfall, largely due to technical issues and other capacity constraints, has resulted in a loss to the market of around 800,000 b/d since the start of 2021. The prevailing lower output levels versus stated monthly increases by the bloc have led to unintended consequences, with sharp draws in global inventories and supply shortfalls compounding tight oil markets,” IEA said.

OECD industry oil stocks declined by 60 million bbl in December, led by large draws in middle distillates across all regions. At 2,680 million bbl, oil inventories were 355 million bbl lower than a year ago and at their lowest in 7 years. Stocks covered 59.6 days of forward demand, a decrease of 0.9 days from a month earlier and 3.2 days below the historical average. Preliminary data for January show OECD industry stocks falling by another 13.5 million bbl.

The global refining industry has underperformed relative to demand for the past 6 quarters, and this is set to continue for most of 2022, IEA forecasts. A 3.8 million b/d forecast increase in throughputs this year lags behind demand growth even as fourth-quarter 2022 runs are forecast to surpass pre-pandemic levels. Further upside is capped by closures and higher energy costs affecting refinery margins.

Benchmark crude oil prices surged by about $15/bbl in January, breaching the $90/bbl threshold for the first time since 2014. Backwardation on the 12-month strip beginning with the April 2022 contract has hit double digits for both WTI and Brent, reflecting low crude stock levels. Despite the significant crude oil price tensions, product price premiums versus the crude markers remain robust and are even rising, indicating product market tightness - notably for gasoil.

Market balance

“Despite higher demand and the recurring failure of OPEC+ to meet its targets, the market is still set to shift to surplus in 2022. Non-OPEC+ producers could add 2 million b/d of supply, and if OPEC+ cuts are fully unwound, the bloc could increase output by 4.3 million b/d. Of course, that would come at the expense of effective spare capacity, which could fall to 2.5 million b/d by the end of the year and end up held almost entirely by Saudi Arabia and, to a lesser extent, the UAE. Iran, if released from sanctions, could add another 1.3 million b/d.”

“If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices. But these risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out.”