Despite COVID-19’s new variants (such as Lambda, Beta and Delta) that have the potential to spread 60% faster than last year’s strain, the latest KAPSARC Oil Market Outlook for Q3 2021(KOMO) forecasts that this quarter should witness significant quarter-on-quarter (QoQ) demand growth of 3.1 MMb/d, a significant increase (60%) over the growth in Q2 2021.
In its analysis, the KOMO cites the impact of the recent OPEC+ agreement that increases production by 400 Kb/d each month and includes baseline adjustments in May 2022 for Saudi Arabia (500 Kb/d), Russia (500 Kb/d), the United Arab Emirates (UAE) (332 Kb/d), and Iraq and Kuwait (150 Kb/d each). The KOMO team assumes that as we enter 2022, a surplus will develop, resulting in OPEC+ members pausing their production levels until demand rebounds at the end of the year.
KAPSARC emphasized that oil prices are underpinned by demand worldwide, and each country’s economic recovery will be affected by vaccination rates, continued stimulus packages, policy and fiscal support for industries and a return to normal in goods and services consumption.
The report showed that OPEC+ aims to reduce market fluctuations through supply management, while countries such as the U.S., China and India have great potential for increasing their demand levels even if sequential growth begins to ease heading into 2022.
Oil also plays a role in containing inflation, as stated by HRH Prince Abdulaziz Bin Salman; “We also have a role in taming and containing inflation by making sure that this market doesn’t get out of hand” KOMO mentioned.
KOMO highlighted that Saudi Arabia’s total oil demand is expected to grow by around 280 Kb/d in this quarter. This growth accompanies the Kingdom’s increased seasonal demand for electricity generation and the Hajj season in last July.
KAPSARC examined several other factors impacting oil markets over the next two years:
Demand dynamics: Total global oil demand is expected to increase year-on-year (YoY) by 4.15 million barrels per day (MMb/d) in 2021 to 96.3 MMb/d. It is expected to grow further by 3.35 MMb/d in 2022 and return to 2019 levels by Q3 2022. KOMO anticipates that the most significant quarter-on-quarter (QoQ) growth will come from the U.S., followed by the OECD Europe and then Russia.
Supply dynamics: Total global oil supply is expected to grow by about 2.15 MMb/d in 2021, and by 4.97 MMb/d in 2022. Much of this supply growth comes from the current bullish price increases, along with an OPEC+ production release schedule that is accelerated compared with prior outlooks. KOMO expects OPEC+ members to carry most of the production rebound in 2021 with increased supply coming from existing capacity instead of new projects.
Challenges: The market may face an oil surplus starting in the winter of 2021/2022 due to seasonal demand declines and a modest non-OPEC+ supply recovery. If inventory builds faster than desired in the first half of 2022, the call on OPEC+ could be for temporary cuts to stabilize the market. In addition to this, pressure is growing on the global oil industry over environmental concerns that could impact public relations, investments, and government regulations, making it difficult for companies to plan for the long term.
Read the full report for key findings from the quarterly KAPSARC Oil Market Outlook and more insights into the future of oil here.