Oil Market Report - May 2021

• Global oil consumption is now forecast to rise by 5.4 mb/d in 2021, 270 kb/d lower than in our previous Report. Europe and OECD Americas have been revised down by 320 kb/d and 515 kb/d respectively in 1Q21, while India’s Covid crisis led us to downgrade its demand in 2Q21 by 630 kb/d. The forecast for 2H21 is left roughly unchanged, however, based on expectations that vaccination campaigns continue to expand and the pandemic largely comes under control.
• World oil supply rose 330 kb/d to 93.4 mb/d in April and will increase further in May as the OPEC+ alliance continues to ease output cuts. Based on the current agreement, global oil production is set to grow by 3.8 mb/d from April to December. For 2021 as a whole, world oil production expands by 1.4 mb/d year-on-year versus a collapse of 6.6 mb/d in 2020. Canada leads non-OPEC+ with growth of 340 kb/d while the US is set to contract by a further 160 kb/d.
• Global refinery throughput in 2021 has been revised lower on demand downgrades, newly announced temporary and permanent shutdowns and in anticipation of a strong hurricane season in the US. As downward revisions mostly affected 2Q21, we maintain our forecast of a strong ramp-up in refining activity in the next four months, with refinery runs expected to peak in August. After a 7.4 mb/d decline in 2020, refinery intake is expected to increase by 4 mb/d in 2021.
• OECD industry stocks fell by 25 mb to 2 951 mb in March, reducing the overhang versus the 2016-2020 average to a marginal 1.7 mb. Product stocks led the draw by 31.3 mb, while crude inventories rose by 6.1 mb. The global supply and demand balance shows implied stock draws easing to 820 kb/d in 1Q21 from 2.28 mb/d in 4Q20. April data for the US, Europe and Japan show that industry stocks fell by a combined 5.8 mb in total, led by crude, NGLs and feedstocks in the US.
• Crude prices rose in April and May boosted by strong economic trends, supply-side concerns, and despite surging Covid cases in some regions. Crude futures rallied by some $7/bbl from a 5 April trough, to $68.81/bbl for ICE Brent and $65.31/bbl for NYMEX WTI on 10 May. Backwardation increased on both contracts. North Sea Dated prices rose from a deep discount in early April to a premium of $0.91/bbl in early of May. However, grade differentials weakened in April.

After nearly a year of robust supply restraint from OPEC+, bloated world oil inventories that built up during last year’s Covid-19 demand shock have returned to more normal levels. During March, OECD industry oil stocks drew by 25 mb to 2 951 mb, reducing the overhang versus the five-year average to only 1.7 mb (and 36.9 mb above 2015-19). Stocks continued to fall in April.

Draws had been almost inevitable as easing mobility restrictions in the United States and Europe, robust industrial activity and coronavirus vaccinations set the stage for a steady rebound in fuel demand while OPEC+ pumped far below the call on its crude. In response, oil prices resumed their upward trajectory during April and into May. At the time of writing, ICE Brent futures traded near $69/bbl while WTI hovered around $65/bbl.

While the market looks oversupplied in May, stock draws are set to resume from June, even with global oil supply on the rise. OPEC+ ministers have endorsed their early April decision to boost supply by more than 2 mb/d from May to July, including a gradual return of 1 mb/d of Saudi production shut in on a voluntary basis since February. Further gains will come from Canada, the North Sea and Brazil after hefty maintenance is concluded. By year-end, world oil production is forecast to rise by 3.8 mb/d from April.

Under the current OPEC+ production scenario, supplies won’t rise fast enough to keep pace with the expected demand recovery. As vaccination rates rise and mobility restrictions ease, global oil demand is set to soar from 93.1 mb/d in 1Q21 to 99.6 mb/d by year-end. Weaker-than-expected 1Q21 oil use in the United States and Europe and a reduced outlook for India due to the recent surge in Covid-19 led us to revise down 2021 demand growth to 5.4 mb/d. The forecast for the second half of the year is largely unchanged, however, on the assumption that the situation in India and elsewhere improves.

The widening supply and demand gap paves the way for a further easing of OPEC+ supply cuts or even sharper stock draws. The group is set to meet again on 1 June to review policy. By that time, there might be clarity on indirect Iran-US nuclear talks taking place in Vienna that could result in the return of Iranian oil to the market. But India’s Covid crisis is a reminder that the outlook for oil demand is mired in uncertainty. Until the pandemic is brought under control, market volatility is likely to persist.