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Edward Bell - Senior Director, Market Economics
Published Date: 15 September 2021
The oil market outlook for 2022 remains constructive with the recovery in demand to remain in place, albeit at a slower pace. There will be persistent downside risks to demand related to the Covid-19 pandemic but as more and more economies learn to ‘live with’ the virus we expect that consumption should be able to return to pre-pandemic trends by the end of next year. Supply will be the more volatile variable with non-OPEC+ supply set to increase rapidly at a time when OPEC+ has a rigid plan to increase output as well. We expect to see some recalibration in OPEC+ production targets for 2022 but that prices should still be able to be supported in a range of USD 60-70/b in the Brent market.
Demand slowing, but not going negative
The IEA has revised its outlook for oil demand growth in 2021 down slightly on the back of the impact of softer consumption in Q3 caused by the spread of the Delta variant of Covid-19 and consequent restrictions on activity in many emerging economies. For 2022, the agency kept its forecasts largely unchanged with a small increase in demand growth (just 85k b/d) to 3.2m b/d.
Similar to other key data points from major economies that have disappointed over the last few months, the impact of the Delta variant represents a slowing but not necessary a reversal of the recovery from Covid-19. The path for oil demand is likely to be uneven: product supplied in the US, which serves as a proxy for demand, surged at the end of August to its highest ever level of 22.8m b/d only to collapse a week later to less than 20m b/d, affected heavily by the impact of Hurricane Ida along the Gulf coast. But it is still likely to be positive. Oil consumption will reach almost 100% of 2019 levels by the end of 2022 according to the IEA, thanks to healthy demand for petrochemical feedstock products and rebounds in gasoline and diesel demand. Jet/kero demand remains a notable laggard and will likely be so until there is more uniformity over quarantine and isolation conditions globally.
Source: IEA, Emirates NBD Research. Note: values for 2022 represent demand where 2019=100.
At 3.3m b/d in 2022, oil demand growth will represent a slowdown from the more than 5m b/d expected for 2021 but will still be miles beyond long-term average growth rates of around 1-1.2m b/d. Emerging economies will account for the bulk of demand growth next year, at an average of 1.8m b/d vs 1.5m b/d in OECD economies and by Q4 in particular, the long-standing pre-pandemic trend of slowing—or indeed negative—demand growth in developed markets is likely to re-emerge.
Stock levels have normalized
The improvement in demand this year has helped to erode the enormous build in stockpiles that accrued in H1 2020 when global mobility halted and oil demand collapsed. The IEA estimates that OECD stocks hit 2.88bn bbl in Q2 2021, around their level at the end of 2019 and more than 330m bbl below their peak level in Q2 2020. We estimate that OECD stocks will come in at an average of 64 days’ worth of OECD demand in 2021, substantially lower than the average of 75 days hit in 2020. In recent weeks, governments have taken steps to further unload inventories to help dampen down local fuel prices (as in the case of China) or offset the impact of hurricane-disrupted production (in the US). At major trading hubs stocks are drawing as well and are near their levels prior to the start of the pandemic with both Amsterdam/Rotterdam/Antwerp and Singapore storage draining in Q3.
Source: Emirates NBD Research
Visible inventories will likely continue to draw over the remainder of September thanks to the impact of Hurricanes Ida and Nicholas along the Gulf coast of the US which will disrupt production—already down in the US by 1.5m b/d as of early September from the end of August—but once the storms dissipate we would expect output to be able to normalize. However, hurricanes are exogenous factors for the oil market and their near-term bullish impacts are normally short lived.
Non-OPEC+ supply outlook is robust
Much more crucial remains the outlook for supply, both from OPEC+ and other producers. We expect that the market will be able to absorb the OPEC+ plan to add 400k b/d per month until the end of the year, and certainly after the impact of hurricanes will likely welcome it. However, the outlook for 2022 to us remains less promising for OPEC+ to maintain its strategy intact.
Source: IEA, OPEC, EIA, Emirates NBD Research
All the major forecasting agencies project a large increase in non-OPEC supplies in 2022 with the EIA the most bullish at a 3.2m b/d increase y/y. High spot oil prices and a futures curve, while backwardated, that is still above the operating expenditure costs of most producers in the US should help to encourage production growth in 2022, even if it falls short of the rapid pace seen in the years before the pandemic. At the current pace of rigs being added, and the productivity of those rigs, we estimate that US shale basins could produce above their March 2020 levels by as early as April 2022, recovering almost 2.5m b/d from their May 2020 lows.
Source: EIA, Emirates NBD Research
Faced with the outlook for a rebound in non-OPEC+ supplies and slower, albeit still decent demand growth, we expect OPEC+ will not be able to carry out its plan to add 400k b/d per month in 2022 as it would contribute to a heavy oversupply in markets. We would expect the end of year OPEC+ meeting, usually held in early December, to provide the timing for a change in strategy where output targets will need to be revised lower at least for the first half of the year before a more gradual increase in output in H2 2022. We outlined the implications for regional growth here.
Emirates NBD Research oil price assumptions
Provided that OPEC+ holds some production restraint, we still believe that oil prices can hold near to their current levels and project an average of Brent at USD 65/b in 2022 and WTI at USD 63/b with oil markets near balanced. Downside risks to this forecast come from OPEC+ choosing to maintain its 400k b/d per month strategy, a flare up of Covid-19 that restricts global mobility again, aggressive monetary policy tightening, particularly by the US Federal Reserve, and a reinstatement of the JCPOA—the Iran nuclear deal. Upside risks to our forecast would include a shallower than expected recovery in non-OPEC+ supply, cool weather conditions over the northern hemisphere winter prompting more demand or a substantial miss of production targets from more constrained producers in the OPEC+ alliance.
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