Mix of beliefs on how much more OPEC+ should pump
The world needs the OPEC+ group to open the taps further to balance the oil market in the coming months — on that everyone agrees. But there’s less unanimity on just how much more crude they will have to pump.
The International Energy Agency, the U.S. Energy Information Agency and OPEC say global oil demand will continue to recover through at least the end of next year. By that point, all three see consumption exceeding comparable 2019 levels and hitting new highs. But there is disagreement on the paths it will take to get there.
The EIA is the most bullish. Unlike the IEA and OPEC, it doesn’t see a significant seasonal dip in demand at the start of next year, with continuing economic recovery offsetting almost all the seasonal effects that normally crimp oil demand in the first half.
As a result, the U.S. government agency sees global oil demand back above its comparable pre-COVID-19 level as soon as the second quarter of 2022. OPEC sees it getting there the next quarter, and the IEA takes the most cautious view on the recovery, joining the consensus only in the final three months of next year.
All three forecasters see oil demand growth slowing toward the sort of levels seen before 2020, as the initial effect of the COVID-19 pandemic recedes and ceases to influence year-on-year comparisons. But the normalization of demand growth rates doesn’t mean the oil market is getting back into balance — far from it.
Having done a remarkable job in sticking to their output targets during the first phase of oil’s recovery, the OPEC+ group now needs to show the same cohesion during the next phase. So far, the group has had to contend with a recovery that has been slower than they envisaged in their April 2020 accord, requiring delays to easing targets and additional cuts from Saudi Arabia.
That’s about to change. The original agreement envisaged no further output increases until its expiration at the end of April 2022, but that will leave the world short of crude, with excess stockpiles built up during the height of the pandemic all but eroded.
A proposal to increase output targets over the coming months foundered when the United Arab Emirates objected to a Saudi proposal to extend the deal to the end of next year unless it received a higher baseline from which its own cuts would be made.
But the world needs more OPEC+ oil over the next 18 months, lots of it.
Reports show a shortfall of OPEC+ crude of about 2 million barrels a day below what is required to balance global supply and demand in the current quarter. That rises to about 3 million barrels a day in the final quarter this year.
All three agencies see the world by the second half of next year needing between 4 million and 5 million barrels a day more crude from the OPEC+ countries than it got in June.
That OPEC+ needs to pump more isn’t contested. But how much more depends on whether you share the more bullish view on demand taken by the EIA or the more cautious outlooks of the IEA and OPEC.
The difference is between 2 million and 3 million barrels a day for as much as six months. That’s going to require hands-on supply management by the producer group.