The IEA suggests in Oil 2021, its latest medium-term outlook, that there may be no return to normal for the world oil market in the post-Covid era. But it then appears to contradict its thesis in its own demand projections.

Global oil demand is, admittedly, rebounding after an unprecedented collapse in 2020. But rapid changes in behaviour caused by the pandemic, including new working-from-home models and cuts to business and leisure travel—as well as accelerated commitments by governments towards decarbonising their economies—“have caused a dramatic downward shift in expectations for oil demand over the next six years”, while possibly pushing forward the timeline for peak oil demand.

This, in turn, is forcing “hard decisions” on oil-producing countries and companies, which on the one hand do not want to be left with stranded oil resources in the longer term but also do not want to invest in new production capacity that may have increased life-of-asset risk. The IEA warns the latter concern is leading to a lack of investment that could cause yet another supply crunch further along the line, as currently vast amounts of spare Opec crude oil capacity is run down.

“The IEA’s core mandate has always been energy security,” Fatih Birol, the agency’s executive director, stressed back in 2019. But this primacy has led some commentators to suggest the agency’s research has an inherent bias towards spotting potential supply shortages, leading it to incorrectly forecast such crunches on previous occasions.

Is this another false alarm? Comparing the oil market fundamentals in the agency’s medium-term oil outlooks pre- and post-Covid offers some clues. Is the evolution of supply and demand predictions in Oil 2021 compared with 2019’s Oil Market Report (OMR) consistent with the IEA’s overarching story of a new normal?

Demand

In Oil 2021, the IEA says global oil demand “is unlikely to catch up with its pre-Covid trajectory”, and its demand outlook supports this assertion. But where things get less consistent is in terms of oil consumption growth, even after global demand rebounds back to 2019 levels in 2022—which might suggest the agency’s demand outlook is too high. Global oil demand is forecast at 102.3mn bl/d in 2024, 4.1mn bl/d less than OMR 2019—2024 is the final year of that outlook—and 104.1mn bl/d in 2026.

But annual global demand growth in the post-rebound period in Oil 2021, from 2023-26, is virtually the same as growth over OMR 2019’s six-year projection period—1.18mn bl/d versus 1.19mn bl/d, respectively (see Fig. 1)—despite much changing for the worse on the geopolitical and economic fronts over the past two years, and for the positive on commitments to quickening the pace of decarbonisation.

 

The key driver for the buoyancy of oil demand growth predictions over the 2023-26 period is relatively strong economic growth, an average of 3.5pc/yr, just 0.1 percentage points less than the IEA’s pre-Covid outlook. This is despite economic globalisation and free trade being threatened under the ‘New Cold War’—with early signs relations between China and the US may worsen, rather than improve, under the Biden administration—while governments and businesses around the world have taken on massive debt to combat the economic fallout from the coronavirus pandemic.

At the same time, and more surprisingly, the annual improvement in global oil intensity over the 2022-26 period is forecast at only 2.3pc, 0.1 percentage points less than across OMR 2019’s projection period, despite a wide range of policies being adopted by major countries over the past two years to improve energy efficiency and promote electric vehicles.