Highlights From The IEA And EIA Oil Market Outlooks
Oil & Gas, Energy, Alternative Energy, CFA
Seeking Alpha Analyst Since 2020
I believe in the value approach to investing and focus on the energy sector. I write mostly about stocks I own. Twitter: @_EnergyRealist
Disclaimer: My articles, blog posts and comments on this platform do not constitute investment recommendations, but rather express my personal opinions and are for informational purposes only. I am not a registered investment advisor and none of my writings should be considered as investment advice. While I do my best to ensure I present correct factual information, I cannot guarantee that my articles or posts are error-free. You should perform your own due diligence before acting upon any information contained therein.
Summary
- Oil prices rallied sharply in early 2021.
- Despite decreasing inventories, the latest IEA and EIA market outlooks see ample OPEC+ spare capacity that should keep a lid on prices.
- While capital underinvestment may push prices higher in the medium term, the short term seems to be driven by OPEC political decisions.
After a very negative 2020, oil prices rallied sharply in early 2021 before giving up some ground. Brent spot averaged $41.96 in 2020; the Brent front-month futures (CO1:COM) opened at $51.09 in 2021 before reaching a high of $71.38 on March 8. The contract has since receded to $63.89 but nonetheless some market observers have started talking about a new commodities supercycle.
The price rally has been matched by a gradual decrease in the inventories surplus accumulated after the COVID lockdowns earlier in 2020:
Yet, both the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) caution that we are still in an environment with ample spare capacity which can come back online quickly.
According to the IEA's March 2021 Oil Market Report:
- Global demand is projected to increase by 5.5 millions barrels per day ((mmbd)) in 2021 which won't fully make up for the 8.7 mmbd contraction in 2020.
- The 4Q21 oil demand gap relative to 2019 is expected to shrink to only 1.4 mmbd.
- Overall demand will be 96.5 mmbd in 2021; full recovery to 2019 levels is expected in 2023.
On the supply side, the IEA comments that:
- Global supply fell by 2 mmbd in February to 91.6 mmbd due to the freezing weather episodes in the US which temporarily knocked out significant production as well as the 1 mmbd extra cut announced by Saudi Arabia above its OPEC+ quota.
- Overall, the OPEC+ group is still withholding approximately 8 mmbd from the market.
The implication is that even as demand recovers, the reversal of the OPEC+ cuts can easily fill the gap.
Similar, though a little more optimistic observations are shared by the EIA's March 2021 Short-Term Energy Outlook (STEO):
- The EIA estimates that February 2021 world consumption reached 95.9 mmbd which is down only 1.6 mmbd from February 2020.
- Global demand for entire 2021 will average 97.5 mmbd, followed by an increase to 101.3 mmbd in 2022 which will slightly exceed the pre-COVID level.
The EIA's forecast anticipates that in the second half of 2021 OPEC+ will gradually increase output. While inventories are to fall by 1.2 mmbd in the first half of the year, in the second half a 0.4 mmbd rise is expected. Therefore, while the EIA sees Brent between $65-$70 in March-April, it expects only $58 in the second half of 2021. Clearly, future production decisions by OPEC+ will be key, but the EIA also calls out the responsiveness of U.S. tight oil production to higher prices as an important factor.
Both outlooks suggest that there is a limit to how much further prices can rise in 2021, given that demand recovery has still not even fully made up for the 2020 OPEC+ cuts. For 2021 overall, the EIA forecast averages $57 WTI and $60 Brent.
In the medium term, it is perhaps less clear if further supply increases can be maintained. Many non-OPEC producers made significant capex cuts in 2020 and are not rushing to restore their capex to pre-COVID levels:
Even when capex eventually increases, there will be a time lag until it translates into production. Other factors, such as inflationary pressures or a weakened US dollar may also contribute to an upward price trend. However, if the IEA and EIA outlooks hold out, OPEC+ should be able to keep a lid on further price increases in the short term.
Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
My articles, blog posts and comments on this platform do not constitute investment recommendations, but rather express my personal opinions and are for informational purposes only. I am not a registered investment advisor and none of my writings should be considered as investment advice. While I do my best to ensure I present correct factual information, I cannot guarantee that my articles or posts are error-free. You should perform your own due diligence before acting upon any information contained therein.
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