Was OPEC Right About Oil Markets?

27 Dec 2021

Oil has had a breakout year, and while some analysts remain optimistic, others are beginning to change their tune.

The IEA has become the first market expert to actually issue demand downgrades based on the Omicron variant.

However, oil price bulls can take some comfort in the fact that the key U.S. market continues to record significant crude draws.

Surplus coming

The International Energy Agency published its December Oil Market Report (OMR) on 14 December and includes a first set of demand downgrades due to the spread of the Omicron variant.

The IEA has forecast global oil demand in Q4 to clock in at 98.6 million barrels per day (mb/d), a downward revision of 300 thousand barrels per day (kb/d), while the Q1 forecast of 97.9kb/d is a downward revision of 630kb/d.

According to Standard Chartered, the current OPEC output is already well above the call on OPEC throughout H1-2022. The IEA estimates that OPEC output was 27.76mb/d in November; allowing for the already agreed increases for December and January, this implies a January average of over 28.2mb/d, and a Q1 average of over 28.4mb/d were OPEC+ to continue with its increases into February and March.

The IEA estimate of the call on OPEC is 27.0mb/d for Q1 and 27.3mb/d for Q2, implying significant inventory builds. If OPEC+ continues with its increases, the IEA forecast is for a stock build of 1.7mb/d in Q1; if it does not, the stock build would be 1.5mb/d. Were OPEC+ to continue with its increases throughout H1-2022 then the IEA forecasts imply a total stock build of about 330mb. Given that the IEA implies that there could be further demand downside due to Omicron and weakening economic performance, the implication would appear to be that OPEC+ is unlikely to continue with its increases. Our own balances carry the same implication (see Omicron weakens Q1 outlook – OPEC+ likely to react). While OPEC+ ministers wrongfooted us in their December meeting by continuing with increases despite a rapidly weakening fundamental outlook, we expect the next OPEC+ meeting (4 January) to result in either a pause (60% probability) or the rolling back of the increase agreed on 2 December (40% probability).

OPEC's view

The OPEC Secretariat published its latest Monthly Oil Market Report (MOMR) on 13 December. The MOMR outlook has been very consistent in its 2022 demand growth outlook; the forecast has been 4.15mb/d in each of the past four reports. The latest report redistributed that growth differently by quarter and also included some baseline changes. The backward-looking demand estimate for Q1-2021 was increased by 950kb/d, and this revised baseline provided the bulk of the 1.115mb/d upwards revision to Q1-2022 demand. China oil demand was revised higher by 500kb/d in both Q1-2021 and Q2-2022. The baseline changes helped to increase the OPEC Secretariat estimate of the call on OPEC in Q1 by 1.073mb/d to 27.9mb/d.

Comparing the q/q change in the estimated call on OPEC crude across the main forecasts shows a q/q decline to the tune of 0.7mb/d according to the Energy Information Administration (EIA); 1.2mb/d according to the IEA, 1.3mb/d according to the OPEC Secretariat while Stanchart puts the q/q decline at 1.1mb/d.

Stanchart notes that while the call on OPEC is falling, OPEC+ is increasing output. At some point, that combination will lead to excess demand giving way to excess surplus. The analysts say this surplus is likely to kick in as early as the current month and accelerate in the early months of 2022.

However, oil price bulls can take some comfort in the fact that the key U.S. market continues to record significant crude draws, with the latest report by the American Petroleum Institute (API) estimating inventory draw for crude oil to be 815,000 barrels.

U.S. crude inventories have so far shed some 61 million barrels since the beginning of the year and have continued defying expectations for crude builds that tend to happen around this time of the year.

Analysts are expecting another large draw of 2.60 million barrels for the current week.

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