In its latest Monthly Oil Report, the IEA called on OPEC+ to increase production in order to counter higher demand in 2022.
The agency claimed that, based on current global economic growth expectations, demand for crude oil and petroleum products will be reaching pre-COVID levels by 2022. The Paris-based energy watchdog, which has come under fire after its shocking Net-Zero by 2050 report called for no more investments in oil and gas, stated that “OPEC+ needs to open the taps to keep the world oil markets adequately supplied”. At the same time, the IEA has also reiterated that market realities are at odds with its proposed strategies to reach net zero-emission levels by 2050. Criticism will likely be harsh for the “former” leading oil and gas agency, as the agency has called upon the world to double down on renewables and commit to the Paris Agreement while admitting that the global economy continues to demand vast amounts of hydrocarbons.
The relevance of some of these reports will have to be reassessed, especially when looking at the high-profile “Golden Age of Gas” report and the “Net Zero by 2050” roadmap. When asked what needs to be done, the IEA indicated that the call on OPEC+ will be very strong, as the international oil and gas producers group will need to increase crude oil supply to the market by 1.4 million bpd in 2022. Which would mean a significant increase over its current July 2021-March 2022 targets.
The demand expectations of the IEA fall in line with some others, as OPEC, the EIA, and independent consultants, have stated before that demand for oil is going to increase substantially. Some even expect volumes in 2022 to be higher than 2019 levels, even as prices are increasing substantially.
A potential additional 1.4 million bpd on the market will not make a real dent in the current bull market. Even Iran’s additional oil exports, if a JCPOA deal is reached, will only mitigate some of the upward price risks. The main wildcard at present is US shale, which could be incentivized by higher crude prices to ramp up production.
The current market situation is very clear. OPEC+ is leading the sector, no matter what political strategies or activist shareholders at IOCs are planning. The market is still fully hydrocarbon addicted, and this will not change overnight.
The IEA also needs to reassess its current strategies and press approach, as a continuation of the diffuse ‘’Lala-land predictions’’ will not make their case stronger.
As indicated by the IEA OMR report demand will increase by 5.36 million bpd in 2021, and another 3.07 million bpd in 2022. At the end of 2022, global demand is expected to be at 99.46 million b/d on average.
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This optimism in the market is widely shared, looking at price predictions from Goldman Sachs, Bank of America, and Citibank, with some analysts even predicting $100 per barrel in 2022.
Some possible hiccups in the market could be new strains of COVID-19 or vaccination setbacks, but at the moment, the likelihood of a full, new global lockdown seems small.
One of the main drivers of the oil recovery is the start of the summer driving season, and as Europe is opening up its borders to holidaymakers again, demand for gasoline and jet fuel are set to recover. The IEA expects jet fuel demand to grow by 1.5 million bpd in 2022, gasoline demand by 660,000 bpd, and diesel demand by 520,000 bpd. These predictions may turn out to be a bit conservative, as Europeans most probably will be using their cars to go abroad, and low-cost plane tickets could do the rest.
The IEA’s call on OPEC+ is clear, as the group holds an official spare production capacity of 6.9 million bpd, even after the agreed output increases of the next couple of months. The call on non-OPEC producers is also growing, and the agency expects non-OPEC production to increase by another 710,000 bpd in 2021. The IEA is also remarkably optimistic about US production levels. It expects the US to add more than 900,000 bpd of supply next year, with Canada, Brazil, and Norway also contributing to production growth.
The main unknown or tricky part in all is what OPEC+ will decide during the coming months. Until now, the cartel has stuck to its output cut agenda, even as some leading members have expressed the desire to produce more.
The outcome of the Iranian nuclear deal negotiations is still hanging over the market, in the meantime, Tehran’s troubles are a stabilizing factor in the market. By pressuring OPEC+, the IEA is playing with fire. The call to open up the taps will be seen by some as a green light for significant production increases. Saudi Arabia, the UAE, and Russia will not watch from the sidelines if others are opening up their taps. A possible reverse situation could be in the offing, as new oil on the market could easily push prices down, and indirectly boost demand. In the eyes of some IEA analysts and last week’s very active NGOs and activist funds, this would be a doomsday scenario for the climate change agreements. For OPEC+ producers the situation is looking increasingly bright, and with prices and demand rising, revenues will shoot up too.
By Cyril Widdershoven for Oilprice.com
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