Compared to April 2020 “Black April”, seen as one of the worst months for global oil markets, April 2021 tells a very different story. Fundamentals are improving and a newfound bullishness is returning to the markets.
Last week, Brent closed at $66.77, up by 5.72% w/w, while WTI closed at $63.13, up by 6.04% w/w, and prices continued to gain momentum on Monday. Prices have been supported by multiple factors including a weaker dollar, strong economic data from China, an improved economic growth forecast from the IMF, and strong demand data from the United States.
Macroeconomic outlooks and fears of inflation are supporting prices
Given the impact of recent economic stimulus, the IMF doubled its global growth forecast in 2021 to 6% including 6.4% predicted growth in the US, 4.4% in Europe, 8.4% in China, 12.5% in India, and 6.7% in other emerging markets.
Furthermore, the Chinese economy grew by 18.3% y/y, 0.6% Q/Q, in Q-1 this year, though from a low base. Chinese exports remain strong in March which is fuelling optimism for oil demand. Chinese exports were seen 30.6% higher compared with their level last year, despite having a slightly slower pace of growth in March compared with February. This is combined with improving manufacturing index data, 51.9 in March, which suggests robust industrial activity.
U.S. bond rates are also rising despite improving job data, an indication of fears of changing the Fed policy on interest rates that may be hiked to control expected inflation. Crude prices are affected by emerging fears of inflation, which is visible through rising bond prices.
Despite the lockdown measures in the EU, Google mobility data shows an increasing number of visits to retail and entertainment venues, suggesting that fuel demand may not be as bad as previously thought. In the meantime, vaccination campaigns are advancing, and the UK has already initiated its first phase of re-opening its economy.
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Additional factors supporting prices include the upward revision of demand forecasts by the IEA and OPEC along with bullish inventory data published by the EIA. OPEC raised its demand growth forecast in 2021 by 70,000 bpd from earlier forecasts to a total of 5.95 million bpd, while the IEA revised up their demand growth forecast by 230,000 bpd to 5.7 million bpd.
Commercial crude oil inventories dropped for the second consecutive week, by 5.9 million barrels, following four weeks of continuous build-ups, standing currently at 492.4 million barrels. If the current demand trend continues, we expect commercial inventories to drop to around 450 million barrels by July. On the other hand, rising covid cases in major consuming countries such as India and Brazil, and the suspension of Johnson & Johnson vaccines in the U.S. resulted in demand uncertainty in the markets which continues to limit crude prices.
Aramco expansion projects set to raise production capacity by 2024
Aramco is said to have given the green light for its capacity expansion projects in three offshore fields, expecting to add an additional 1.15 million bpd to the company’s maximum sustained production capacity of around 12 million bpd. According to Argus, 38 companies were awarded contracts to carry out the expansion in the Zuluf, Marjan, and Berri fields by 600,000 bpd, 300,000 bpd, and 250,000 bpd, respectively. The size of the investment is estimated to be around $18 billion and is seen as the largest investment in the upstream sector since the pandemic. Aramco is said to be targeting a total production capacity of 13 million bpd by 2024.
US demand data continues to strengthen
U.S. demand data continues to show strength, and product demand is almost back at 2019 levels. Last week, the EIA showed that U.S. petroleum product demand stood at 20.33 million bpd including 8.90 million demand for gasoline. Furthermore, U.S. refinery input is just above 15 million bpd, only 1 million lower than its level before the pandemic.
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While demand continues to pick up, U.S. oil production continues to lag behind 2019 levels. Total production of liquids is seen as almost unchanged since November 2020, ranging between 10.9-11.1 million bpd. We remain highly doubtful of any projected rise in the level of U.S. production in 2021 in spite of higher prices and a rising rig count.
By Yousef Alshammari for Oilprice.com
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In view of the above, I continue to project that global oil demand will return to pre-pandemic level of 101.0 million barrels a day (mbd) by the middle of 2021 with Brent crude hitting $70-$80 a barrel by the third quarter of this year and averaging $65 for the year. By the second half of 2022 or the first quarter of 2023 we may even see $100 oil triggered by a global supply-deficit estimated at 10.0 mbd.
As for Saudi Aramco’s plans for oil production expansion, I very much doubt if Aramco could manage at all to expand the production capacity of the Zuluf oilfield. The reason is that Zukuf is one of five giant oilfields accounting for more than 90% of Saudi oil Production. The other four are Ghawar, Safaniya, Hanifa, Khurais. They are more than 73 years old and are being kept producing by a huge injection of water. In 2019 Saudi Aramco admitted for the first time that Ghawar which is the cornerstone of its production has declined from 5.0 mbd to 3.8 mbd. And with a 6% depletion rate, Ghawar could now be producing 3.36 mbd.
If this is the case, it is fair then to suggest that the same depletion would have also affected Zuluf and the other oilfields of the same age.
Saudi Aramco might have better luck in expanding the production capacity of the two smaller offshore Marjan and Berri oilfields by an estimated 300,000 b/d and 250,000 b/d respectively after 2023. Still, the increase will neither offset the continuing decline in Saudi’s five giant oilfields nor in Saudi oil production.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London