Oil Market Report - December 2021

• A surge in new Covid cases is expected to slow the recovery in global oil demand, with air travel and jet fuel most affected. On average, oil demand has been revised down by around 100 kb/d since last month’s Report for both 2021 and 2022. Global oil demand is now set to rise by 5.4 mb/d in 2021 and by 3.3 mb/d in 2022, when it returns to pre-pandemic levels at 99.5 mb/d.
• Global oil production is poised to outpace demand from December, led by growth in the US and OPEC+ countries. As this upward trend extends into 2022, the US, Canada and Brazil look set to pump at their highest ever annual levels, lifting overall non-OPEC+ output by 1.8 mb/d in 2022. Saudi Arabia and Russia could also hit records if remaining OPEC+ cuts are fully unwound. In that case, global supply would soar by 6.4 mb/d next year compared with a 1.5 mb/d rise in 2021.
• Refinery throughput surged by a hefty 1.9 mb/d in November and is forecast to rise by another 660 kb/d this month, when it is set to breach the 80 mb/d threshold for the first time since the start of 2020. For 2021 as a whole, refinery runs are forecast to rise by 3.1 mb/d on average, recovering just 42% of 2020’s decline. Another 3.7 mb/d increase in throughputs is expected in 2022.
• OECD total industry stocks fell by 21.2 mb in October, as a build in crude oil inventories was more than offset by sharply lower product stocks. At 2 737 mb, total stocks were 243 mb below the 2016-2020 average. Preliminary data for November show industry stocks decreased by a further 23 mb, and crude oil held in short-term floating storage rose by 8.4 mb to 134.5 mb.
• Benchmark crude oil prices plunged by $15-17/bbl over the course of November, as concerns over Covid-19, inflation and economic growth weighed on the market. North Sea Dated prices were down $2.17/bbl for the month on average to $81.37, but hit a low of $68.87/bbl on 1 December before recovering to around $75/bbl at the time of writing.

As 2021 draws to a close, the oil market appears to stand on a better footing than it has for some time. Much needed relief for tight markets is on the way, with world oil supply set to overtake demand starting this month. The emergence of the Covid-19 Omicron variant at the end of November sparked a steep sell-off in oil, but initial pessimism has now given way to a more measured response. Even so, at the time of writing Brent crude was trading roughly $10/bbl lower than at the start of November, at around $75/bbl.

The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway. Global oil demand is forecast to grow by 5.4 mb/d in 2021 and a further 3.3 mb/d next year, when it rebounds to pre-Covid levels at 99.5 mb/d. New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous Covid waves, not least because of widespread vaccination campaigns. As a result, we expect demand for road transport fuels and petrochemical feedstocks to continue to post healthy growth. However, due to new restrictions on international travel, we have revised down our global oil demand forecast for 2021 and 2022 by 100 kb/d on average, primarily to account for reduced jet fuel use.

At the same time, oil supplies are on the rise with world oil output up by a further 970 kb/d in November. For a second month running, the biggest single increase came from the US, where drilling activity is picking up. OPEC+ production rose by 450 kb/d. As the upward supply trend extends into 2022, the US, Canada and Brazil are set to pump at their highest ever annual levels, lifting output from non-OPEC+ by 1.8 mb/d in 2022 overall. Saudi Arabia and Russia could also set records, if remaining OPEC+ cuts are fully unwound. In that case, global supply would soar by 6.4 mb/d next year compared with a 1.5 mb/d rise in 2021.

In the near term, additional barrels could come from strategic petroleum reserves (SPRs). The US announced on 23 November a release of up to 50 mb of oil from its SPR, with parallel actions by China, India, South Korea, Japan and the UK, in an effort to ease energy prices. While details on volumes and timings are still sparse, the combined SPR releases could potentially amount to as much as 70 mb. Those volumes, if taken up by the market, could help replenish depleted industry inventories. OECD industry stocks fell by 21 mb in October to 2 737 mb, some 240 mb below the most recent five-year average. Preliminary data point to another 23 mb decline in November.

The steady rise in supply combined with easing demand has considerably loosened our balances for 1Q22 compared to last month’s Report. Assuming OPEC+ continues to unwind its cuts, a surplus of 1.7 mb/d could materialise in 1Q22 and 2 mb/d in 2Q22. If that were to happen, 2022 could indeed shape up to be more comfortable.