Expanding supply, fragile demand to keep oil prices weak

Dubai: Average oil prices are expected to remain below $60 a barrel in 2021, according to the latest forecast by the Institute of International Finance (IIF), a Washington based association of global financial institutions.

“We are keeping our oil price forecast unchanged at $60/bbl for 2021. We see global oil inventories rising supported by the gradual recovery in oil supply. On April 1, OPEC+ agreed to gradually increase production over the next three months, with the view to restore a quarter of the production cuts agreed a year ago in response to the pandemic,” said Garbis Iradian, Chief Economist MENA, IIF.

Prices for Brent oil, the international benchmark, averaged $62.5/bbl in Q1 2021, up $20/bbl from the average for 2020.

Oil demand Image Credit: The IIF

We expect production cuts by OPEC+ to ease in May as Saudi Arabia’s voluntary cut may not be renewed. Another threat to the oil market is the likely significant increase in Iran’s oil exports in the second half of this year

Garbis Iradian, Chief Economist MENA, IIF

Fragile demand

While rising oil prices continue to reflect gradual recovery in global demand, they were also supported by temporary supply limitations, including the following factors Saudi Arabia’s January decision to cut production by an additional one million barrels per day (mbd) in February and March; OPEC+ extension of existing production cuts and Saudi Arabia’s pledge to extend its voluntary production cut through end-April; disruptions of US Gulf Coast oil production in January and February due to extreme winter weather conditions in Texas, where wellheads and processing facilities are vulnerable to the effects of extremely cold weather; and more recently, the Suez Canal blockage, which backed up shipments of about 13 million barrels of crude oil and petroleum products at the entrances of the canal.

These temporary factors have contributed to a significant global petroleum inventory drawdown so far this year, the IIF sees global oil supply exceeding demand and oil prices moderating for the rest of this year.

“We expect production cuts by OPEC+ to ease in May as Saudi Arabia’s voluntary cut may not be renewed. Another threat to the oil market is the likely significant increase in Iran’s oil exports in the second half of this year,” said Iradian

Supply surge

Iran is reported to have already increased its oil exports, particularly to China. The Biden administration would rejoin the 2015 nuclear agreement with Iran and other world powers, on one key condition: “If Iran returns to strict compliance with the nuclear deal”. If such an agreement is reached by July of this year, Iran could raise its oil production from 2.15 mbd in Q1 2021 to 3.8 mbd by Q4 2021; while it is a member of OPEC, it is not bound by the current supply deal.

Shale factor

The IIF has observed that the recent higher oil prices started to stimulate the shale sector, which could lead to higher production and keep a lid on the prices recovery. While the breakeven oil prices vary significantly by US regions, most shale acreage is profitable with WTI at over $50/bbl.

The US oil and gas rig count, which is a leading indicator of production in the coming months, has increased from an average of 250 rigs in Au-gust 2020 to about 420 in March 2021, according to energy market analysis by Baker Hughes. As a result, the IIF expects US crude oil production to pick up gradually for the rest of this year and even more in 2022. We expect total non-OPEC oil production for this year to increase by 1.6 mbd driven by the USA, Canada, Brazil, and Norway.

“We expect global oil demand to rise by 5.4 mbd in 2021 to 96.8 mbd after falling by 8.5 mbd in 2020. Fiscal stimulus in advanced economies, particularly in the USA, and the progress of coronavirus vaccinations should support the strong global economic recovery and global oil demand,” said Iradian.

Despite an increase of consumption in advanced economies the IIF said it is unlikely that global demand for oil this year will shift back to the 100 mbd level seen in 2019 before 2023, given the new wave of coronavirus infections and renewed lockdowns in Europe and elsewhere, which may dampen hopes for a strong re-bound in fuel demand in the near term.

In addition the IIF estimates that the decline in the elasticity of global demand since the mid-1990s, with respect to GDP, would accelerate, as changes in behavior (including working-from- home and cuts in business and vacation travel) due to the pandemic and the adoption of policies by major economies to support a low-carbon future will reduce further the growth in global demand for oil.

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