Oil Market Aims to Recover

The Global Oil Market Aims to Recover by 2022

Sun Aug 22 2021 14:16
Global oil markets have experienced an oil rebound from the enormous shock demand that was triggered by the coronavirus pandemic. The demand for crude oil and crude oil WTI is expected to increase to 105 million barrels per day (mb/d) by the year 2026.

This is an increase of 4% from the 2019 levels. However, according to oil market analytics by the International Energy Agency (IEA), there is still a great uncertainty that is putting oil markets to test as never before.  

Governments Pushing for Clean Energy 

The global oil demand is forecasted to decrease and this is catalyzed by governments focusing more on clean energy by introducing stronger behavioural changes and policies. 

Furthermore, the coronavirus pandemic accelerated the decline in oil demand although it is not a lasting one. For the demand for oil to peak, substantial action is swiftly required to enhance the standards of fuel efficiency, reduce the use of oil commodities in the power sector, and accelerate the sales of electric vehicles.  
These actions combined with increased recycling increased teleworking and decreased business travel could result in a decline of oil use by about 6 mb/d by the year 2026. This could mean that the oil market may never get back to pre-pandemic production levels. 

A smooth transition away from fossil fuel is crucial to attaining the desired climate goals, but there have to be key policy changes as well as hastened behavioural changes from governments. Without that, the world oil demand is expected to rise each year from now to the year 2026.  

Asia Leading the Demand for Crude Oil 

Asia has dominated the growth in oil demand and is expected to continue doing so. According to the oil market report by IEA, Asia accounts for 90% of the growth between 2020 and 2026. 

On the other hand, the demand in several advanced economies, where oil use per capita and car ownership are greater, is not predicted to return to pre-pandemic oil market levels.  

Oil Markets from the Supply Point of View 

On the supply side, there is increased uncertainty about the outlook which has posed a dilemma for key oil producers. The investment decisions that are currently made might either bring on too little oil to meet the demand or too much oil that will be left unused. 

In 2021, a marginal rise is expected in the global upstream investment after oil operators utilized only two-thirds of what was planned when the year began.  
Oil market analytics forecast that the global oil production capacity will rise by 5 mb/d by the year 2026. Simultaneously, the historic demand collapse led to a spare oil production capacity cushion of 9 mb/d which means that global markets can relax in the near term.  
To meet the increased demand for oil by 2026, the supply has to increase by 10 mb/d by 2026. The Middle East, spearheaded by Saudi Arabia, will offer half of that growth, mostly from the existing shut-in capacity. 

The expanding market share of the Middle East would indicate a sensational shift from previous years where the United States dominated the growth of oil. According to the current policy settings, the supply growth of the US is expected to return as activity and investment levels pick up. 

However, any growth is unlikely to return to the lofty levels that were seen in previous years.  

Transition to Clean Energy 

The transitions to clean energy will not spare any oil or gas company and therefore, each part of the oil industry has to respond as pressure builds on the global drive to zero emissions. Reducing emissions especially methane from the core operations is an urgent priority.  
Additionally, several technologies could significantly help the energy transitions and can be useful to oil and gas companies. They include low-carbon hydrogen, carbon capture, offshore wind, and biofuels. These technologies can greatly help to decarbonize oil sectors where it's the most challenging to tackle.  

Every Major Producer of Oil Aims to Recover 

The world's refining sector is facing challenges with excess capacity. At least shutdowns of about 6 mb/d will be needed to allow the rates of utilization to get back to normal levels. In the meantime, the Middle East, India, and China continue to surge new the growth of new capacities.

Therefore, imports of Asian crude oil are predicted to increase to 27 mb/d by the year 2026. This will require greater levels of Atlantic Basic production and the Middle Eastern crude to fill that gap.  
The petrochemical sector will maintain the lead in demand growth, with LPG, naphtha, and ethane combined accounting for more than 70% of the predicted growth in demand of oil commodities by 2026. 

On the other hand, the gasoline demand could have peaked, as efficiency gains, as well as the transition to electric vehicles, keep offsetting the growth of mobility in developing economies.  
The demand for aviation fuels, the sector that was hardest hit by the coronavirus pandemic, is set to return gradually to the pre-pandemic levels. 

However, a transition to conferences and online meetings, along with persistent efforts by corporates to reduce costs and hesitation by citizens to continue leisure travel, could impact travel trends permanently.  

Oil Market Report as of August 2021 

According to the Oil Market Report (OMR) released by IEA in August 2021, the global oil demand increased month-on-month by 3.8 mb/d in June, due to the increased mobility in Europe and North America.

However, the growth in demand reversed abruptly during July and the outlook for the rest of 2021 has been decreased because of the worsening effects of the pandemic and the revisions to historical data. On average, the global oil demand is now growing by 5.4 mb/d in 2021 and 3.2 mb/d in 2022.  
The recovery of the global refined products has slowed down as the new waves of the coronavirus continue to greatly reduce the demand for fuel while the margins remain under pressure. 

Before the seasonal maintenance begins, throughputs are forecasted to marginally increase in August. Global demand for refined products is now expected to increase to 77.9 mb/d (a growth of 3.7 mb/d) in 2021.  

Crude Oil Overview 

In June, the total OECD industry stocks decreased by 50.3Mb to stand at 2,882Mb. The implied crude oil prices in China decreased for three consecutive months by 35.5Mb in June. Globally, the 2Q21 crude oil prices lost steam during July due to fears that the weaker economic indicators and the new coronavirus delta strain could reduce the oil demand recovery. 

Regardless of that, the North Sea Dated still increased from $2.03/bbl. to $74.99/bbl. although it was reduced to $70.73/bbl. during early August.  

Summary - Wrapping it Up 

So, are the current conditions indicating that the oil market will recover or not? The future of crude oil, refined products, and other fossil fuels will depend on the strategies that oil companies will undertake to adapt to the situation.  
For the oil market to become successful, oil companies should undertake bold M&A moves, reinvent their portfolio by reallocating their capital to the opportunities with the highest returns, ensure resilience in their supply chains by redefining their strategic partnerships, and lastly, design an organization for the future both structure-wise and talent-wise. 

The fundamentals of the oil industry have changed and the rules that will shape the next normal will be tough. Jump to top 
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