(Montel) A surge in new Covid-19 cases – including the Omicron variant – could slow the recovery in oil demand for this year and next, the International Energy Agency warned in its latest monthly report published on Tuesday.
It now estimated demand would grow by 5.4m bbl/day this year and a further 3.3m bbl/day next year, when it rebounds to pre-Covid levels at 99.5m bbl/day.
“The surge in new Covid-19 cases is expected to temporarily slow, but not upend, the recovery in oil demand that is underway,” the IEA said in its latest report.
“New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous Covid waves, not least because of widespread vaccination campaigns,” it said.
“As a result, we expect demand for road transport fuels and petrochemical feedstocks to continue to post healthy growth. However, due to new restrictions on international travel, we have revised down our global oil demand forecast for 2021 and 2022… primarily to account for reduced jet fuel use.”
The emergence of the Covid-19 Omicron variant at the end of November “sparked a steep sell-off in oil, but initial pessimism has now given way to a more measured response”, the IEA said.
Indeed, in early December the benchmark price for Brent crude North Sea oil was trading around USD 21 below the multi-year peak above USD 86/bbl reached in October. It has since recovered somewhat to around USD 75/bbl.
On Tuesday, the 13-nation group of Opec said it expected the impact of the Omicron variant on global oil demand to be “mild and short-lived, as the world becomes better equipped to manage Covid-19 and its related challenges”.
Regarding oil production, the IEA said world output rose by 0.97m bbl/day month on month in November. "For a second month running, the biggest single increase came from the US, where drilling activity is picking up," it said.
"As the upward supply trend extends into 2022, the US, Canada and Brazil are set to pump at their highest ever annual levels, lifting output from non-Opec+ by [1.8m bbl/day] in 2022 overall.”
Meanwhile, oil production from Opec and its Russia-led partners, known as Opec+, rose by 0.45m bbl/day in November, according to the IEA report.
“Saudi Arabia and Russia could also set records [in 2022], if remaining Opec+ cuts are fully unwound. In that case, global supply would soar by [6.4m bbl/day] next year compared with a [1.5m bbl/day] rise in 2021.”
Opec+ agreed this month to boost oil supply in January by 0.4m bbl/day, the same amount as in each month since August. It had cut output by a record 9.7m bbl/day in May-July 2020 due to demand destruction caused by Covid-led lockdown measures.
Surplus in 2022?
The IEA noted that a potential global supply surplus could emerge in the first half of next year, particularly with the releasing of additional barrels from strategic petroleum reserves in the US and other major oil-consuming nations.
The US announced on 23 November a release of up to 50m barrels of oil from the nation’s strategic reserve (SPR), with parallel actions by China, India, South Korea, Japan and the UK, in an effort to ease energy prices.
“While details on volumes and timings are still sparse, the combined SPR releases could potentially amount to as much as 70m [barrels]. Those volumes, if taken up by the market, could help replenish depleted industry inventories,” the IEA said, noting that OECD industry stocks in October were around 240m barrels below the most recent five-year average.
The IEA said that easing demand combined with the steady rise in supply – and assuming Opec+ continues to unwind its production cuts – could see a surplus of 1.7m bbl/day materialise in the first quarter and 2m bbl/day in the second quarter.
“If that were to happen, 2022 could indeed shape up to be more comfortable,” the IEA added.