Supply outlook tightens as OPEC+ prepares to meet

As OPEC+ meets today, oil prices are supported by tightening oil market fundamentals for the second half of 2021. Global natural resources consultancy Wood Mackenzie forecasts total oil demand to rise 5.9 million barrels per day (b/d) year-on-year for 2021.

Ann-Louise Hittle, vice president, Macro Oils, said: “This strength is due to comparison with the sharp drop we saw last year when the pandemic cut personal mobility in many countries. As shutdowns end in the largest consumer nations, such as the US and China, demand is returning to more normal levels each quarter.”

After increasing output from May to June by 2.1 million b/d, as it meets on 1 July, OPEC+ now needs to decide if further gains are needed starting in August.

Hittle said: “With the recovery in demand under way, and OPEC+ holding about 5.8 million b/d of oil production off the market, our forecast shows both the third and fourth quarters short of supply, with a significant drawdown in inventory expected for each.

“The outlook is based on our assumption OPEC+ increases its production gradually by roughly 1 million b/d from July through December. If the group delays a decision to boost output, we expect prices to increase from the current $75 per barrel level towards $80 for Brent.”

She added that strong prices during July would likely lead to another OPEC+ meeting in early August and agreement to lift output for the next few months.

“OPEC+ is aware of the potential risk to demand if the varying rate of Covid-19 vaccination and the spread of the Delta variant triggers brief shutdowns that hurt oil demand,” she said.

“The group is also aware of the slightly weaker fundamentals expected for 2022 when, according to WoodMac’s forecasts, US Lower 48 production is projected to increase 0.5 million b/d year-on-year. Global oil demand is expected to rise 4 million b/d in 2022.

“The month-to-month meetings allow OPEC+ producers to assess if demand growth is slowing or inventories are building. We expect OECD crude inventories to fall through the remainder of 2021.  If demand were weaker than expected, OECD crude oil inventories could resume building.”

Hittle said: “If oil export sanctions on Iran were lifted, we would not expect a sharp move downward in prices. Iran's output could be absorbed by the demand strength both this year and into next as the demand recovers in the wake of the pandemic.”

The current OPEC+ production restraint agreement covers the period through end-April 2022.