Oil Market Report – March 2021

• World oil demand is expected to rebound by 5.5 mb/d in 2021 after contracting by 8.7 mb/d in 2020. Consumption appears to be slightly higher than expected in 1Q21, supported by cold weather in northern Asia, Europe and the US. A stronger economy and vaccine deployment will support growth in 2H21, reducing the oil demand gap vs 2019 from 4.8 mb/d in 1Q21 to 1.4 mb/d in 4Q21.
• Global oil supply fell 2 mb/d in February to 91.6 mb/d after a cold snap shut in US production and Saudi Arabia made an extra cut of 1 mb/d. OPEC+ agreed to extend most of its cuts through April, with Saudi keeping its extra cut in place. Non-OPEC+ will see output rise by 700 kb/d in 2021 after a 1.3 mb/d drop in 2020. US oil supply is set to decline by 180 kb/d, after a fall of 600 kb/d in 2020.
• Global refinery throughput rose 440 kb/d in January but was 5 mb/d lower year-on-year. Arctic weather in the US caused a 1.9 mb/d m-o-m decline in February throughput and a 1 mb/d downward revision to the global 1Q21 estimate. Chinese refinery runs were 2.2 mb/d higher than a year ago in January-February, and are estimated to have reached a new record high of 14.3 mb/d in February. Global throughput is set to resume growth from 2Q21.
• OECD industry stocks fell for the sixth consecutive month in January. A monthly decline of 14.2 mb left inventories at 3 023 mb, 63.2 mb above their 2016-2020 average. Crude oil stocks led the fall with a counter-seasonal 23.7 mb draw. February data for the US, Europe and Japan show that total industry stocks fell by 52.6 mb (1.88 mb/d) in total, led by lower gasoline and middle distillate stocks in the US.
• Crude futures rose $7/bbl in February to an average $62/bbl and leapt to $70/bbl in early March after OPEC+ rolled-over cuts and following an attack on the Saudi Ras Tanura terminal. Prices rose with cold weather in the northern hemisphere and were supported by growing confidence in vaccine rollouts and the economy. Forward price curves rose above $50/bbl on NYMEX WTI, boosting producer hedging. At the time of writing, Brent was trading at $68/bbl and WTI near $65/bbl.

Oil’s sharp rally to near $70/bbl has spurred talk of a new super-cycle and a looming supply shortfall. Our data and analysis suggest otherwise. For a start, oil inventories still look ample compared with historical levels despite a steady decline from a massive overhang that piled up during 2Q20. By the end of January, OECD industry stocks, at 3 023 mb, were still 110 mb higher than a year ago – at the onset of the Covid crisis.

On top of the stock cushion, a hefty amount of spare production capacity has built up as a result of OPEC+ supply curbs. The group agreed a record 9.7 mb/d output cut last year and is still withholding roughly 8 mb/d from the market. In February, OPEC’s spare capacity (excluding Iran) stood at 7.7 mb/d, with much of it in the Middle East. Non-OPEC countries taking part in the deal hold an additional 1.6 mb/d that could be brought on to the market in short order.

For now, OPEC+ continues to restrict supply. Lofty stock levels and a still fragile recovery in oil demand led the group to agree on 4 March to broadly extend cuts by one month into April. Saudi Arabia also rolled over its extra 1 mb/d cut and said it would gradually phase it out at the right time. The OPEC+ decision helped boost crude to its highest since May 2019, with Brent near $70/bbl and WTI at around $65/bbl. OPEC+ is to meet on 1 April to chart policy for May.

Producers not taking part in the deal will see output rise by 700 kb/d in 2021 after a decline of 1.3 mb/d in 2020. US production, hit hard by freezing temperatures in February, is expected to decline by 180 kb/d in 2021, despite a gradual improvement in activity from last year’s slump.

As for demand, a return to growth lies ahead. Global oil demand was stronger than expected at the start of the year, boosted by colder weather and improved industrial activity in the US and elsewhere. Demand is set to rise by 5.3 mb/d from 1Q21 to 4Q21, as the economic recovery and vaccine programmes gather pace and containment measures ease. For 2021, global oil demand is forecast to grow by 5.5 mb/d to 96.5 mb/d, recovering around 60% of the volume lost in 2020. Oil demand will return to 2019 levels by 2023, as shown in our OIL 2021 report released today.

The prospect of stronger demand and continued OPEC+ production restraint point to a sharp decline in inventories during the second half of the year. For now, however, there is more than enough oil in tanks and under the ground to keep global oil markets adequately supplied.