Paris February 12 2022: The oil market has “only a small cushion” due to dwindling spare capacity and shrinking stocks, the International Energy Agency said Feb. 11, cautioning that the supply shortfall could deepen if OPEC+ continues to struggle to raise output.
“If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices,” the IEA said in its monthly oil market report.
On the demand side, the Paris-based organization trimmed its growth forecast for 2022 to 3.23 million b/d but still expected demand to exceed pre-pandemic levels, averaging 100.58 million b/d.
Its warning came with Dated Brent prices trading near seven-year highs of almost $100/b as the physical oil market has tightened considerably on resurgent demand and declining oil inventories.
One of the biggest reasons for the tighter market is because OPEC and its allies have struggled to meet their self-imposed output targets owing to outages, and capacity and technical issues.
The IEA called on those producers with effective capacity, like Saudi Arabia and the UAE, to pump more barrels to help pacify the market.
“But these risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out,” the IEA said
Swing to surplus
However, the IEA said it still expected the market to shift to a surplus in 2022 based on a 2 million b/d increase in production by non-OPEC+ producers and if OPEC+ fully unwound its cuts.
But it acknowledged that in this scenario, effective spare capacity, could fall to 2.5 million b/d by end-2002 with almost all of it held by Saudi Arabia and, to a lesser extent, the UAE.
“Iran, if released from sanctions, could add another 1.3 million b/d,” the IEA said. “Although total effective OPEC+ spare capacity is now assessed at 5.1 million b/d, we estimate that only 2.2 million b/d — held primarily by Saudi Arabia and the UAE — could be brought online in short order.”
The prolonged underperformance by OPEC and allies had effectively taken 300 million barrels, or 800,000 b/d, off the market since the start of 2021, the IEA said.
Supply growth in 2022 will now be driven by producers outside the OPEC+ alliance like US, Canada, Brazil and Guyana.
US oil supply will grow by 1.2 million b/d in 2022, up 240,000 b/d from its previous guidance, the IEA said. “Further increases are expected in the coming months as new projects start up and US shale continues to respond to higher prices.”
On stocks, the IEA said OECD industry inventories declined steeply to seven-year lows in December, falling by “a hefty” 60 million barrels, led by large draws in middle distillates across all regions.
Crude and product stocks are unlikely to reach more “more comfortable” levels until late in Q3 2022, with little prospect for a fulsome recovery.
Demand outlook
The impact on oil demand from the omicron COVID-19 variant had been “milder-than-expected” and was offset by increased demand in the US due to a cold snap, and a continued switch to oil from gas in some industries, the IEA said.
It anticipated mobility restrictions being limited in the second half of 2021, supporting a strong recovery in transportation demand.
The continued rally in natural gas prices was also proving to a boon for oil demand. “Clean, low sulfur oil products present a viable, lower cost alternative to many energy consumers faced with extremely high spot natural gas prices, particularly in Europe,” it said.
Meanwhile, the agency made significant upward revisions to historical demand data sets going back 15 years but said, “overall growth rates are barely changed”.
The reassessment was mainly centered on natural gas liquids and petrochemicals, which are “products and sectors that are the least transparent in the oil balance”.
The IEA changed its estimates for historical demand in 2021, 2020 and 2019 to 97.35 million b/d, 91.80 million b/d and 100.32 million b/d, respectively.
The upward adjustments mainly reflect a rise in demand for petrochemicals in China and LPG in Saudi Arabia.
“We have raised our demand estimates for China, the world’s largest petrochemical producer and consumer, for 2019 by 360,000 b/d,” the IEA said. “Our second major adjustment has been made to domestic oil consumed in Saudi Arabia … we have adjusted estimates for domestic LPG consumption up by around 500,000 b/d.”
