Global oil markets rebalancing, says IEA

‘World oil markets are rebalancing after the COVID-19 crisis spurred an unprecedented collapse in demand in 2020 – but may never return to normal,’ according to the International Energy Agency’s (IEA) latest medium-term outlook.

The report, Oil 2021: Analysis and forecast to 2026, claims that rapid changes in behaviour from the pandemic, along with a stronger drive by governments towards a low carbon future, have caused a dramatic downward shift in expectations for oil demand over coming years to 2026. Indeed, the IEA asks whether oil demand could peak sooner than expected if governments follow through with strong policies to hasten the shift to clean energy.

‘These forces are creating a dilemma for oil-producing countries and companies that are reluctant to leave resources in the ground or build new capacity that could sit idle. But if this leads to a shortfall in investment, it could also have geopolitical implications and heighten the risk of supply shortages later on,’ warns the IEA.

In 2020, oil demand was nearly 9mn b/d below the level seen in 2019 and is not expected to return to that level before 2023. In the absence of more rapid policy intervention and behavioural changes, oil demand is projected to be pushed up to 104.1mn b/d by 2026 – an increase of 4.4mn b/d from 2019 levels. However, the IEA anticipates that oil demand in 2025 is set to be 2.5mn b/d lower than was forecast a year ago.

All of this demand growth is expected to come from emerging and developing economies, underpinned by rising populations and incomes. Asian oil demand, in particular, will continue to rise strongly – albeit at a slower pace than in the recent past. OECD demand, by contrast, is forecast to return to pre-crisis levels.

The report suggests that gasoline demand is unlikely to return to 2019 levels, ‘as efficiency gains and the shift to electric vehicles eclipse robust mobility growth in the developing world’. Aviation fuels, the hardest hit by the crisis, are expected to slowly return to 2019 levels by 2024, ‘but the spread of online meetings could permanently alter business travel trends’.

The petrochemical industry is expected to remain a ‘pillar of growth’ over the forecast period. Ethane, LPG and naphtha together account for 70% of the projected increase in oil product demand to 2026.

Against the background of the COVID-induced demand shock, upstream investments and expansion plans have been scaled back, ‘not surprisingly’, notes the IEA. In 2020, operators spent one-third less than planned at the start of the year (and 30% less than in 2019). In 2021, total upstream investment is expected to rise only marginally. Those spending cuts and project delays are constraining supply growth across the globe, with world oil production capacity now set to increase by 5mn b/d by 2026.

Producers from the Middle East are expected to provide half the increase, largely from existing shut-in capacity. If Iran remains under sanctions, keeping the world oil market in balance may require Saudi Arabia, Iraq, the UAE and Kuwait – with their surplus capacity – to pump at or near record highs. The IEA points out that this ‘marks a dramatic change from recent years when the US dominated world supply growth’. It continues: ‘In the current policy environment, US production growth is set to resume as investment and activity levels pick up in tandem with rising prices. Yet any increase is unlikely to match the lofty levels of the recent past.’

The global market still looks adequately supplied through much of the medium term. But in the absence of fresh upstream investment, the spare capacity cushion will slowly erode. By 2026, global effective spare production capacity (excluding Iran) could fall to 2.4mn b/d, its lowest level since 2016, concludes the IEA.