Q2 2021: What's oil's recovery outlook?

While myriad risks remain, as discussed later in this article, the global vaccination drive and consequent economic reopening are buoying demand. In another Interview, a senior executive from CMarkits Ltd posited that pre-crisis levels could be reached by mid-2022, but “that assumes that the vaccination rate is much faster than the rate at which the virus changes from one form to another, or, even if it changes, then we don’t have a new variant that is resistant to the available vaccines now.”

OPEC+ is one force supporting prices. In late July, responding to increased prices in the face of constrained supplies, the group agreed to boost oil supplies by 400,000 b/d from August to December. The IEA executive is “not surprised” by their actions. Indeed, “it is that discipline which has helped bring the market back towards rebalancing”. The CMarkits executive echoed this sentiment, saying that OPEC+ “has been the largest or one of the largest supporters to the current price environment”. 

With stock falling, “the prices are looming towards levels where we might start to see a recovery in investment… but prices have not yet recovered to levels which we think could be detrimental to the ongoing recovery in demand. It’s a difficult balance.” They believe this “sweet spot” sits at around USD 65-80 per barrel. 

But there is a risk with OPEC+. “As long as the relationship between Russia and Saudi Arabia remains strong, OPEC will continue to be in a very powerful position to manage the market”, said the CMarkits specialist. The two countries had previously strained relations regarding oil supplies during 2020, with the media calling it a price war.

Another risk to the strength of OPEC+ is what happens with Iran. While there has been a long history of these dating from the 1979 Iranian revolution, more recently the UN imposed sanctions on Iran in 2006 after it failed to comply with nuclear weapon non-proliferation agreements, and in 2010 its oil and financial industries were targeted with restrictions by the US. Ongoing negotiations talks had been paused at the time of writing. But our Interviews explored what could happen if a deal is reached. 

“If, for the sake of argument, an agreement were reached in the next few weeks to restore the nuclear deal and presumably give the green light to lifting the sanctions and the restoration of exports at pre-sanctions capacity, Iranian crude supply could, by the end of this year, be about 800,000 barrels per day higher than it is now”, commented the former IEA executive. However, Iran is not part of OPEC and therefore not subject to its production agreements, and this specialist believes its full return to the market has already been anticipated. The CMarkits executive, on the other hand, believes that the fact prices remain around USD 60-69 shows that investors are sceptical about a deal being reached.

Meanwhile, China’s demand for oil has rocketed during the past year. Taking advantage of cheaper prices to bolster storage capacity, “China’s demand still went up in 2020 by 300,000 barrels per day, which is pretty extraordinary”, remarked the former IEA executive. In fact, putting it into context of the global oil demand recovery, “which is going up by about five-and-a-half million barrels per day, just over one million barrels per day of that is in China.” They attributed this to a strong recovery across most sectors, “leading to significant upward pressure on petrochemicals”, and domestic aviation.

Another country that could hold a huge sway over what happens to oil demand and prices is India. As the world’s second-largest crude oil importer and third-biggest consumer, the CMarkits executive remarked that what happens with the outbreak in India could drastically reduce demand. “According to our initial estimations, we see something like 500,000 barrels per day that could be taken off the Indian demand in 2021. Before… this latest situation in India, we saw a demand in India about 5.2 million barrels a day, and that’s an average in 2021, and now we’re seeing something around 4.6 million barrels a day.”

The US is both a huge market and supplier of crude and refined products. “Demand in the US is very good. Data coming this week from the EIA shows 19.3-19.5 million barrels product demand.” However, when it comes to supply, the CMarkits executive believes that policies of the US president, Joe Biden, could have a dampening effect. As well as promoting green energy, his administration “has come with an agenda on banning fracking on federal land, and that could mainly affect states like New Mexico, which produces something like 1.3 million barrels.” Consequently, in future, they do not see demand reaching 13 million barrels/day this year or next.

The COVID-19 pandemic has also impacted the US’s refining industry. As an advisor from HSB Solomon Associates LLC noted in a Forum Interview, “utilisations were probably… on average down by 20-25%. Products were really more like 30-35% down.” However, this wasn’t the case across the board, as “there are a lot of refining companies that kept their assets at full utilisation and others that were cut back to the bare bone.” Going forward, higher prices could also pose an issue. “The primary advantage that US refineries had for a long time was low energy prices. Very low.” Looking at their counterparts in Asia, for example, the specialist explained how “in order to remain competitive, if they were a merchant refinery that was actually not going into a constrained market, they had to be super competitive in all of the other components of operating cost.” 

As a result, the US could struggle to compete: “The US doesn’t have any more knobs to turn. Its energy is cheap. It’s really struggling for labour. It has some of the most stringent environmental health and safety regulations and costs. It has a whole lot of governments, regional and local governments, that are not particularly in favour of their operation to begin with. They’re facing pretty significant odds… I think it’s going to plateau and then, ultimately, start tailing.” 

With myriad downside and upside risks, there is still much that could derail the recovery of oil demand and supply. However, there are some certainties. “The speed of the demand recovery that we have seen in more recent months has been led by the vaccination programme, I guess that is the surprise. I’m not surprised by the discipline of the OPEC-plus countries.”