The EIA is the most bullish of the three major forecasting agencies. 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 of 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 level as soon as the second quarter of 2022. OPEC sees it getting there the following quarter, with the IEA taking the most cautious view on the recovery and joining the consensus only in the final three months of next year.
All three forecasters see oil demand growth slowing back toward the sort of levels seen before 2020, as the initial impact of the Covid-19 pandemic recedes and ceases to influence year-on-year comparisons. None sees oil demand peaking on a global basis, but the IEA stands out as the only one of the three to forecast consumption in the developed nations of the OECD falling below year-earlier levels in the final quarter of next year, with Europe the first region to experience a drop.
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 of producers 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 expiry 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 UAE 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.
Comparing the three agencies’ forecasts of the call on OPEC+ crude — obtained by subtracting non-OPEC+ production and OPEC condensates and natural gas liquids (light forms of oil from gas fields and gas processing plants) from global oil demand — with June production levels, the shortfall becomes clear.
The 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 of this year.
But the outlooks for the first half of 2022 are much less consistent, reflecting the different views on demand from the three agencies. In stark contrast to the EIA, which sees the need for more than 4 million barrels a day of OPEC+ crude above last month’s production levels, both OPEC and the IEA see a period of relative weakness, possibly requiring a brief lowering of output targets.
Consensus returns to the forecasts in the second half of next year, when all three agencies see the world 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 it needs to pump 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.