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Oil market to return to surplus led by US and OPEC+ output hikes

The International Energy Agency (IEA), in its Jan’22 oil market outlook report, has raised its estimate for global oil demand for both CY21 and CY22 by 0.2mmbpd due to softer covid restrictions. Further, it expects net global refining capacity to rise by 1.2mmbpd in CY22 vs. net reduction of 0.7mmbpd in CY21; however, Asian refiners are likely to benefit from potential reduction in oil product exports from China.

The declining trend in OECD oil inventory continued with inventory falling 6mmbbl MoM to 2,756mmbbl, which is a 7-year low. However, oil production from non-OPEC+ countries is expected to rise by 1.8mmbpd in CY22 with US accounting for 56% of the growth. Hence, global oil supply could rise by 6.2mmbpd in CY22 assuming OPEC+ output rises by 4.4mmbpd once the output cut is fully reversed. Hence, IEA expects the oil market to return to surplus.

* Raises oil demand estimate for CY21 and CY22 on softer covid restrictions: The IEA, in its Jan’22 Oil Market Report, raised global oil demand estimate by 0.2mmbpd for CY21 and CY22 due to softer covid restrictions. Hence, IEA estimates global oil demand to grow by 5.4mmbpd in CY21 (at 96.4mmbpd) and by a further 3.3mmbpd in CY22 (at 99.7mmbpd). However, it expects global oil demand to fall by 1.1mmbpd QoQ in 1QCY22 due to seasonal decline combined with more teleworking and limited air travel. (Exhibit 1-2)

* Net global refining capacity expected to rise by 1.2mmbpd in CY22 vs. net reduction of 0.7mmbpd in CY21: Global refining capacity fell by 0.7mmbpd in CY21, declining for the first time in 30 years as closures outweighed new capacity additions. However, IEA expects net global refining capacity addition at 1.2mmbpd in CY22 with refining throughput expected to rise 3.7mmbpd in CY22. IEA expects Asian refiners to benefit due to likely moderation in growth of China’s throughput to under 0.3mmbpd in CY22 (vs. average growth of +0.6mmbpd in recent years) and resultant reduction in China’s transport fuel exports (aided by steady demand recovery).

* OPEC+ continues strong compliance with output cuts: In Dec’21, OPEC’s output was 28.0mmbpd (up 190kbpd MoM) led by Saudi Arabia (up 120kbpd at 10.0mmbpd) and Iraq (up 30kbpd to 4.3mmbpd); however, Libya’s output declined 90kbpd MoM to 1.05mmbpd. Hence, OPEC compliance rose to 128% in Dec’21 (vs. 124% in Nov’21). OPEC+ compliance was at 121% in Dec’21 (vs. 124% in Nov’21) with Russia’s compliance rising to 107% (from 96% in Nov’21) and Saudi’s compliance steady at 101%. (Exhibit 4-5).

* OECD oil inventory continues to fall: By end-Nov’21, OECD oil inventory declined 6mmbbl MoM to 2,756mmbbl, which is a 7-year low; preliminary data for Dec’21 shows oil inventory fell by a further 45mmbbl MoM though there has been some increase in floating oil inventory (Exhibit 3).

* Oil market to return to surplus led by output growth in US and OPEC+: Oil production from non-OPEC+ countries is expected to rise by 1.8mmbpd in CY22 after an increase of 0.5mmbpd in CY21 with US accounting for ~1mmbpd or 56% of the growth (aided by Canada and Brazil). EIA expects US crude output to grow to 11.8mmbpd in CY22 and to 12.4mmbpd in CY23 (from 11.2mmbpd in CY21). (Exhibits 7-8). Hence, global oil supply could rise by 6.2mmbpd in CY22 (vs. 1.5mmbpd rise in CY21) assuming that OPEC+ output rises by 4.4mmbpd once the output cut is fully reversed. This will reduce OPEC+ effective spare capacity to 2.6mmbpd in 2HCY22, held primarily by Saudi Arabia and UAE. Call on OPEC crude is estimated at 27.8mmbpd in CY22 (vs. 27.5mmbpd in CY21).

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