OIL AND GAS

SUPPLY CUTS AND RISING DEMAND BOOST OIL MARKET

Brent crude prices briefly surpassed USD 70 per barrel amid concerted efforts by Saudi Arabia, other members of the Organization of the Petroleum Exporting Countries and non-OPEC allies, such as Russia and Oman, to support the oil market.

Prices were buoyed after OPEC and non-OPEC ministers in March extended their current production levels to April, with the exception of Russia and Kazakhstan, which were allowed to increase production by 130,000 and 20,000 barrels per day (bpd), respectively.

The group also commended Saudi Arabia for the extension of its additional voluntary adjustments of 1 million bpd until April 2021, exemplifying its leadership, and demonstrating its flexible and pre-emptive approach to manage the market.

“Overall conformity with the original decision was 103%, reinforcing the trend of aggregate high conformity by participating countries,” OPEC said in a joint statement.

“The meeting noted that since the April 2020 meeting, OPEC and non-OPEC countries had withheld 2.3 billion barrels of oil by end of January 2021, accelerating the oil market rebalancing.”

RISING DEMAND

There are fundamental and structural reasons for more robust prices. Global oil demand averaged around 90.3 million bpd, only 9.7 million bpd less compared to 2019. The declines are not as weak as originally feared given that parts of the global economy were in extended periods of lockdowns and economic activity took a hit.

OPEC expects global oil demand to rise to 96.1 million bpd in 2021,a 6.4% increase over the previous year, with positive developments on the global economic front, supported by massive stimulus programmes, which will boost demand especially in the second half of the year.

“In 2021, global oil demand is forecast to grow by around 5.8 million bpd, recovering some of the losses seen in 2020. At the same time, global GDP growth is projected to rebound based on positive developments, particularly in the US, China and India in 4Q20,” OPEC said.

“With regard to oil demand, the negative impact of the containment measures on transportation fuels is expected to carry over, particularly into 1Q21, with a stronger rebound in oil demand growth, especially for industrial fuels, forecast in 2H21.”

China will lead global demand in 2021, after a 0.45 million bpd increase last year in consumption, despite the lockdowns. Overall, Chinese demand will grow 1.1 million bpd in 2021 to reach 14.14 million bpd, an 8.45% increase over 2020.

Other emerging markets including rest of Asia, the Middle East and South America will also see an increase in oil demand, with India witnessing a 13.45% increase in demand to just under 5 million bpd this year, OPEC forecasts.

Among sectors, a resurgent aviation sector and the general travel sector will be key driver of global oil demand.

“Oil-intensive sectors, especially travel and transportation, accounted for a disproportionately large drop in overall world oil demand in 2020, compared to the decline in global economic growth, while the slower recovery in these sectors is expected to have a less positive impact on oil demand growth in 2021,” OPEC said.

At the same time, supply is either being curtailed or will see moderate growth from key producers.

Supply from Organisation for Economic Co-operation and Development (OECD) countries such as the United States and Canada will grow around 1.86 million bpd in 2021, but will be offset by declines elsewhere such as Russia and India, leading to a total increase from non-OPEC sources to 63.33 million bpd in 2021, lower than the 64.76 million bpd delivered in 2020.

Meanwhile, call on OPEC crude will reach 27.5 million bpd in 2021, an increase of 5 million bpd compared to 2020.

With the global economy showing signs of returning to its normal levels and pent-up demand expected to lead to a rebound in travel and consumption, the conditions are ripe for oil prices to remain at healthy levels throughout the year.

Indeed, there are concerns that lower prices in much of the past decade has led to many producers shelving large-scale projects, which could lead to supply bottlenecks in the future.

Mohammad Sanusi Barkindo, the OPEC secretary general, discussed the need for continued investment at the 11th IEA-IEF-OPEC Symposium in February, and emphasised the need for continued investment in the oil industry to ensure stability of supply and to help maintain an inclusive approach to addressing climate change, the energy transition and energy access challenges.

"These investments are essential for bothproducers and consumers," Barkindo said.