Oil Market Report - September 2021

• Global oil demand is estimated to have declined for three straight months due to a resurgence of Covid-19 cases in Asia. As a result, 3Q21 has been revised down by 200 kb/d since last month’s Report. Already signs are emerging of Covid cases abating with demand now expected to rebound by a sharp 1.6 mb/d in October, and continuing to grow until end-year. Global oil demand is now expected to rise by 5.2 mb/d this year and by 3.2 mb/d in 2022.
• World oil supply fell 540 kb/d m-o-m in August to 96.1 mb/d and is expected to hold steady in September as unplanned outages offset increases from OPEC+. Hurricane Ida shut in 1.7 mb/d of oil production along the US Gulf Coast at end-August, with potential supply losses from the storm approaching 30 mb. An uptrend in supply should resume in October as OPEC+ continues to unwind cuts, outages are resolved and as other producers increase.
• A steep fall in China’s refinery activity in July, followed by Hurricane Ida’s impact on US refining in August and September resulted in an 830 kb/d revision to the 3Q21 global refining throughput, which now stands at 78.5 mb/d, up 1.5 mb/d from 2Q21. In August, the first significant decline in crude prices since September 2020 boosted product cracks and refinery margins across the board.
• OECD total industry stocks drew by 34.4 mb in July and stood at 2 850 mb, 185.7 mb lower than the 2016-2020 average and 120.3 mb below the pre-Covid five-year average. Preliminary data for the US, Europe and Japan show industry stocks decreased by a further 31.1 mb while crude oil held in short-term floating storage decreased by 20.3 mb to 101.7 mb in August.
• Prices fell on average in August, trading in a wide $8-9/bbl range, and the forward price curve flattened substantially. The drop reflects concerns about economic growth, inflation prospects and weaker oil demand linked to rising Covid infections. By early September, supply losses from Hurricane Ida lifted prices almost back to early July levels. North Sea Dated prices lost $4.24/bbl in August to $70.75/bbl and WTI at Cushing fell $4.73/bbl m-o-m to $67.73/bbl.

Unexpected outages during August forced a decline in supply for the first time in five months and extended the sharp drawdown in global oil stocks. The most severe by far was Hurricane Ida, which wreaked havoc on the key US Gulf Coast oil producing region at the end of August, knocking 1.7 mb/d offline. Concerns over the impact of rising Covid-19 cases on oil demand kept a lid on prices, however, with benchmark crudes falling month-on-month before edging marginally higher in early September. At the time of writing, Brent futures traded at around $73.80/bbl and WTI at $70.70/bbl.

Hurricane Ida is still causing problems for US and global markets. Offshore installations and refineries have been slow to restart due to the severity of the storm, forcing massive stock draws of both crude and products in key markets. The biggest impact on supply will be seen in September, with total supply losses estimated at around 30 mb.

Already in August, production outages led to further sharp declines in inventories. Preliminary data show OECD oil stocks falling by more than 30 mb last month, extending steep losses over June and July. By the end of July, OECD total industry stocks stood 185.7 mb below the most recent five-year average. With nearly 900 kb/d of crude output and 700 kb/d of refinery capacity offline at the time of writing, hefty draws are expected to continue through September.

The US Department of Energy announced on 23 August a sale of up to 20 mb from its Strategic Petroleum Reserve (SPR) as part of its programme to use the SPR to finance spending. The deliveries will take place between 1 October and 15 December and could offset some of the losses from Hurricane Ida. The US government is also loaning barrels from the SPR to the region’s refiners to help offset crude shortfalls. China, too, is tapping into its strategic reserves. For the first time ever, it will sell oil from state-owned tanks in an effort to dampen domestic oil prices and inflationary pressures. It is unclear how many barrels will be made available to the market.

At the same time, demand growth in China and elsewhere in Asia is under pressure from resurgent Covid cases. We have revised down our world oil demand forecast for August and September by nearly 600 kb/d as China and a number of other South Eastasian countries enforce more mobility restrictions. Strong pent-up demand and continued progress in vaccination programmes should underpin a robust rebound from 4Q21. Our annual growth forecast is revised marginally lower since last month’s Report for 2021 (-110 kb/d) to 5.2 mb/d while 2022 growth is slightly higher, at 3.2 mb/d.

The market should shift closer to balance starting from October if OPEC+ continues to unwind production cuts. Even so, it is only by early 2022 that supply will be high enough to allow oil stocks to be replenished. In the meantime, strategic oil stocks from the US and China may go some way to help plug the gap.