OPEC, IEA see stronger oil demand, rising prices

Sopuruchi Onwuka

Figures and forecasts by the world’s oil market antagonists, the Organization of Petroleum Exporting Countries (OPEC) and International Energy Association (IEA) confirm that galloping demand propels increase in the prices of crude oil and natural gas liquids.

Whereas OPEC keeps market intelligence for world’s bloc of mainly oil dependent countries, the IEA delivers similar energy advisory roles for the Organization of Economic Cooperation and Development (OECD). And both bodies pumped out figures weekend, confirming widening gap between oil consumption and supply.

Stronger demand amidst voracious global oil consumption currently support stronger prices and raise fears of worsening inflation in consumer nations.  

Oil market report for January release by OPEC weekend showed that crude oil spot prices rebounded in January 2022, compared to the previous month, “as oil futures markets surged.”

“Crude prices were supported by strong global oil market fundamentals amid dissipating fears about the impact of the COVID-19 Omicron variant and geopolitical risks, which raised concerns about near-term oil supply,” OPEC stated in the report.

The IEA confirmed in its own report that the OECD industry oil inventories plunged by a hefty 60 million barrels in December, to stand 255 million barrels below the five-year average and at their lowest level in seven years.

“Over the past 12 months, industry stocks have declined by 355 mb despite the release of more than 50 million barrels of oil from government reserves over the same period.

The IEA warned that energy prices and volatility in the sector could rise further due to supply issues among the group of major producing nations.

As expected the IEA blamed OPEC for the widening gap between demand and supply, accusing the producers’ bloc comprising OPEC and 10 non member producing countries (OPEC+) of under-producing their self imposed targets since the group started restoring about 10 million barrels per day withdrawn from the market since 2020.

IEA said on Friday that If OPEC+ continues to fail in delivering its oil production targets amid rising demand and inventories at multi-year lows, oil prices will remain under upward pressure and are set for more volatility.

The agency which works for the OECD countries estimated in its Oil Market Report for February that OPEC+ under-produced its target by 900,000 barrels per day (bpd) in January, warning of dire global economic consequences as, according to the agency, global economic growth and associated oil demand would continue to mount upward pressure on prices.

The IEA estimated global growth rates for 2022 to remain largely unchanged from its previous forecast, adding that the economic growth would call for additional 3.2 million barrels per day to push world oil demand to about  100.6 million barrels per day, as restrictions to contain the spread of COVID ease.

And with slow increase in oil supply, IEA said that rise in demand would cause the level of industry stocks globally to continue to shrink.

It stated that an OECD industry oil stock declined by a steep 60 million barrels in December, led by large draws in middle distillates across all regions.

“Oil inventories in developed economies were 355 million barrels lower than a year ago and at their lowest in seven years. Preliminary data for January show OECD industry stocks declined by another 13.5 million barrels.

“Global oil supply rose by 560,000 bpd to 98.7 million bpd in January, mostly from countries outside the OPEC+ pact, while OPEC+ continued to show chronic underperformance versus targets.

“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,” said the IEA.

The agency pointed out that “if OPEC+ cuts are fully unwound, the bloc could increase output by 4.3 mb/d. Of course, that would come at the expense of effective spare capacity, which could fall to 2.5 mb/d by the end of the year and end up held almost entirely by Saudi Arabia and, to a lesser extent, the UAE.”

In its own monthly oil market report also released weekend, OPEC stated that crude oil production by its members in January increased month on month by 0.06 million barrels per day to average 27.98 million barrels per day.

Natural Gas Liquids (NGL) output from the bloc was forecast to grow by 0.1 mb/d both in 2021 and 2022 to average 5.1 mb/d and 5.3 mb/d, respectively.

“Demand for OPEC crude in 2021 is revised up by 0.1 mb/d from the last month’s assessment to stand at 27.9 mb/d, around 5.0 mb/d higher than in 2020. Demand for OPEC crude in 2022 was also revised up by 0.1 mb/d from the last month’s report at 28.9 mb/d, around 1.0 mb/d higher than in 2021. These figures are nearly accurate with alternate estimates by the IEA.

The OPEC monthly oil market report prepared by the secretariat stated that prices for the group’s Reference Basket increased $11.03, or 14.8%, to settle at $85.41/b in January, its highest monthly value since September 2014.

“Similarly, crude oil futures prices increased on both sides of the Atlantic with the ICE Brent front month up $10.77, or 14.4%, in January to average $85.57/b and NYMEX WTI rising by $11.29, or 15.7%, to average $82.98/b. As a result, the Brent/WTI futures spread narrowed by 52¢ to an average of $2.59/b,” the report contained.

There is correlation between the rising prices and economic growth in key industrialized nations.

OPEC reported particularly better-than last quarter, 2021 growth levels in the US and China leading to upward revision world gross domestic growth (GDP) from 5.5% in the previous assessment to 5.6%.

“Global growth for 2022, however, remains unchanged at 4.2%. US GDP was reported at 5.7% for 2021, while the growth forecast for 2022 remains unchanged at 4%.

 “Euro-zone economic growth for 2021 and 2022 remains at 5.2% and 3.9%, respectively. Japan’s economic growth forecast for 2021 and 2022 is unchanged at 1.8% for 2021 and 2.2% for 2022.

“China’s 2021 growth was reported at 8.1% and the forecast for 2022 remains at 5.6%. India’s forecast for 2021 is unchanged at 8.8%, while the 2022 forecast was revised up to 7.2% from 7% previously, taking into account the acceleration in growth levels in 2H21 and an expected carry-over into 1H22.

“Russia’s GDP growth forecast remains at 4% for 2021 and 2.7% for 2022. Brazil’s economic growth forecast for 2021 is unchanged at 4.7% and remains at 1.5% for 2022.

“Brazil’s economic growth forecast for 2021 is unchanged at 4.7% and remains at 1.5% for 2022.”

The growths compelled significant rise in oil demand.

OPEC stated that “the market structure of all three crude benchmarks – ICE Brent, NYMEX WTI and DME Oman – strengthened significantly in January over the previous month as market perception of the outlook for the supply-demand balance improved. Hedge funds and other money managers turned more positive about oil prices, increasing net long positions to their highest level since last November.”

OPEC called attention to key uncertainties including the spread of COVID-19 variants and the effectiveness of vaccines, as well as the pace of vaccine rollouts worldwide.

“Moreover, supply chain bottlenecks and sovereign debt levels in many regions, together with rising inflationary pressures and the responses of central banks, also require close monitoring,” the group stated.

OPEC slightly upgraded world oil demand growth in 2021 by 17 tb/d, “reflecting the latest data trends across the regions,” to now stand at 5.7 mb/d.

“Both 3Q21 and 4Q21 figures for OECD Americas are revised higher, mainly as a result of the better performance in the US, confirming the upward revisions taken last month,” the bloc statrded.

“Overall, non-OECD growth in 2021 increased by 3.1 mb/d while the OECD recorded growth of 2.6 mb/d. In the OECD, the US continued to be the major driver of oil demand, recording growth of 1.6 mb/d.

“In 2022, oil demand growth is expected at 4.2 mb/d unchanged from last month, with OECD and non-OECD projected to grow by 1.8 mb/d and 2.3 mb/d, respectively.

“In the OECD, optimism arises from economic growth with the supportive effects of fiscal and monetary policies expected to more than offset the negative effects from Omicron on oil demand. Industrial activities are also anticipated to accelerate, boosting diesel demand.

“Meanwhile, mobility has recovered substantially with domestic, regional and international flights already showings signs of recovery,” OPEC stated.

Non-OPEC liquids supply growth in 2021 is revised down by 0.06 mb/d to around 0.6 mb/d year on year, to average 63.6 mb/d. An upward revision, mainly to the US, was offset by downward revisions in the supply forecasts of other countries such as Brazil, China, Canada, Ecuador and the UK due to unexpected lower output in 4Q21.

The 2021 oil supply forecast primarily sees growth in Canada, Russia, the US, China, Guyana, Argentina, Qatar and Norway, while output is projected to decline in the UK, Brazil, Colombia and Indonesia.

For 2022, non-OPEC supply growth remained unchanged at 3.0 mb/d year on year, to average 66.6 mb/d.

The main drivers of liquids supply growth are expected to be the US and Russia, followed by Brazil, Canada, Kazakhstan, Norway and Guyana.