Since the 2003 U.S.-led invasion that toppled Saddam Hussein, Iraq’s Grand Ayatollah Ali Sistani has played a key role in Iraq’s religious and political spheres, particularly as a staunch opponent of vilayet e-faqih.
Global oil demand is expected to pick up in the second half of the year to levels that will exceed supply, despite the expectation of additional crude oil volumes from producers in the OPEC+ alliance of OPEC and non-OPEC countries, according to the International Energy Agency and OPEC May reports. Despite optimism on prospects of a strong demand recovery, the two reports cite the resurgence of coronavirus cases in India as an element of uncertainty in their forecasts. Oil prices, however, shrugged off concerns over India and moved higher, briefly topping $70 per barrel for benchmark Brent crude on May 18, for the first time since the start of the pandemic, in response to improved market fundamentals and drawdowns in global oil inventories.
Despite a sharp downward revision to second quarter demand estimates by the IEA and OPEC, by 510,000 b/d and 300,000 b/d respectively, the IEA’s Oil Market Report and OPEC’s Monthly Oil Market Report see demand accelerating in the second half of the year, resulting in a supply gap of more than 1 million barrels per day in the third quarter and over 2 mb/d in the fourth quarter. The IEA forecasts demand will reach the pre-pandemic level of 99.6 mb/d in the fourth quarter despite a revision for the full year of 270,000 b/d below its April estimate. OPEC projects fourth quarter demand will reach 99.7 mb/d, assuming the coronavirus situation in India is brought under control. The IEA estimates oil demand will rise by 5.4 mb/d for the year to 96.43 mb/d; OPEC pegs demand for the full year at 96.46 mb/d, up by 6 mb/d over 2020. Both estimates fall short of 2019 demand, which was close to 100 mb/d.
Both the IEA and OPEC downgraded their forecasts for India’s economic growth in 2021, however the revisions still show 10% growth for the Indian economy despite the surge of coronavirus cases. Nevertheless, the IEA slashed its forecast for Indian oil demand substantially by 825,000 b/d for May. As the world’s third-largest importer of crude oil, any downward revision to India’s demand is of concern to Middle Eastern producers, the biggest suppliers of crude to India and the rest of the Asian market. The Indian government has blamed output restrictions from the OPEC+ group of 23 countries led by Saudi Arabia and Russia for the recent rise in oil prices to the $70 per barrel range, some $30/bbl above the 2020 average. This has dampened India’s appetite for OPEC oil with Saudi supplies falling sharply in the first quarter of the year while imports of U.S. crude for the same period tripled, the latest statistics on India from MEES show. MEES reports that OPEC’s share of Indian oil imports declined sharply in the first three months of 2021 to 64.3%, a record low, while Saudi Arabia’s share alone shrank to a record low of 14.4%, representing a 31% year-on-year decline. As demand for refined products due to restricted mobility in India has fallen, Indian refineries have started to cut their processing runs, and that may translate into even lower imports of crude oil, which were already down by 13% for the first quarter. Shipping data from the commodity data and analytics platform Kpler points to further declines in imports in April and early May.
The downward revision for Indian oil demand suggests that the overall outlook for global demand may be subject to review if India’s coronavirus crisis is prolonged. The IEA noted that, on top of the coronavirus surge in India, weaker than expected oil use in the United States (the aftereffect of the Texas cold weather disruption in February and the recent outage of the Colonial Pipeline following a cyberattack) and lower consumption in Europe led to the demand downgrade. The IEA report noted that, “India’s Covid crisis is a reminder that the outlook for oil demand is mired in uncertainty,” qualifying the recovery in global demand as “fragile.”
OPEC’s report echoed concerns about uncertainties with the market, saying they “remain unusually high particularly due to issues related to COVID-19 developments, including potential increase in cases of infection, the emergence of new variants and the acceleration or deceleration of vaccination rollouts. Other factors to be monitored closely over the short term include developments in the global and regional economic outlooks, progress in industrial activity and labor markets and the effect of monetary and fiscal stimulus measures.” The report cited high infection rates in Brazil, Peru, and Colombia as possibly weighing on the demand outlook.
On the other end of the spectrum, Brazil is among a few countries that will influence supply-side dynamics. The IEA expects oil output from Brazil, Canada, and the North Sea to rise just as the OPEC+ producers begin to ease restrictions and gradually increase their output. Under an agreement reached in early April and validated again on April 27, collective OPEC+ output under the Declaration of Cooperation will increase by 2.1 mb/d in agreed upon increments from May to July, including a gradual rollback of Saudi Arabia’s voluntary cut of 1 mb/d in February and March. The IEA forecasts the world oil supply will rise by 3.8 mb/d between April and the end of the year.
However, this increase in supply “comes nowhere close to matching our forecast for significantly stronger demand beyond the current quarter,” according to the IEA. The report added: “Under the current OPEC+ production scenario, supplies won’t rise fast enough to keep pace with the expected demand recovery.” The IEA expects that higher vaccination rates and the easing of restrictions on movement imposed in 2020 in much of the world will cause demand to soar from 93.1 mb/d in the first quarter of 2021 to 99.6 mb/d by the end of the fourth quarter, though it expects final demand for the full year to be slightly lower at 96.43 mb/d. “The widening supply-demand gap paves the way for a further easing of OPEC+ supply cuts or even sharper stock draws,” the IEA noted.
While this would seem a welcome development for the OPEC+ producers, many of which are in desperate need of additional revenue from oil sales to redress the financial strain caused by the 2020 oil price collapse, there are a number of unknowns that may yet alter market balance on the supply side. Under the original OPEC+ deal reached in April 2020, the group agreed to an unprecedented output reduction of 9.7 mb/d from an October 2018 baseline of 32.9 mb/d to steady markets in the wake of the bruising demand destruction wrought by the coronavirus pandemic. The easing of the output restrictions will take combined OPEC+ output to 36.34 mb/d, a level that ministers agreed would be maintained until April 2022.
Stronger demand and falling global oil inventory levels, which have already started to decline, would allow OPEC+ to reconsider its policy at the end of the year, when the supply picture might look different should Iran return to markets. This will depend on the progress of indirect nuclear talks between the United States and Iran in Vienna and whether Washington will lift energy sanctions that were imposed in 2018 by the administration of former President Donald J. Trump after it withdrew from the Joint Comprehensive Plan of Action. In view of the projections for a supply deficit, Iranian oil would easily be absorbed without upsetting the market’s balance should an agreement be reached in Vienna. Iran is exempt from the OPEC+ output restrictions but its oil output has been creeping up in recent months. According to price reporting agency Platts, Iranian oil production rose to 2.14 mb/d in February, around half of its pre-sanctions capacity.
Exports of Iranian oil have so far been limited to China, which has continued to import Iranian oil in defiance of U.S. sanctions. Iran says it expects to be able to restore exports to 2.5 mb/d once sanctions are lifted, though that number is probably inflated. India, stung by a diplomatic spat with Saudi Arabia over OPEC output policy, would be a natural market for Iranian crude oil, which is likely to be offered at preferential rates as Tehran tries to claw back its share of the Asian market. India’s openness to competition is evident in the increased diversity of its imports with the United States taking a chunk out of the Middle East’s traditional market. India and China will be the main drivers of global oil demand growth in the years ahead and the IEA predicts that India will overtake China by the mid-2020s as the largest consumer of crude oil.
IEA India Oil Demand by Report Date
Libya, which is not a party to the OPEC+ agreement, has managed to restore output as political conditions have improved, though production has been erratic as a result of poor infrastructure and a shortage of funding for the oil sector. Production declined from an 8-year high of 1.3 mb/d in April to 1 mb/d in May as the Libyan National Oil Company was forced to shut down production from key fields.
The OPEC+ alliance has taken to meeting monthly as a way of keeping a close watch on market developments in uncertain times. It is also keeping traders and speculators guessing as to its intentions while contending with the unknowns that Libya and Iran might throw up. Ministers are due to meet again on June 1, though that is likely to be a perfunctory affair to endorse the April decision to complete the final phase of output increases by July. According to the IEA, the ministers “have the flexibility to ramp up relatively quickly to fill any substantial gaps that could emerge.” They also have a hefty spare capacity cushion of roughly 7 mb/d, excluding Iran, to tap into, it noted. “Even in a scenario which foresees increasing volumes from Iran, provided a deal were to be reached to restore the nuclear deal and ease sanctions, OPEC+ would still produce 1.7 mb/d below the call during the fourth quarter,” the IEA added.
Iran and Libya, both committed members of OPEC, may not be active participants in OPEC+, but they stand to benefit from the improved market conditions and price rises that were the direct result of the April 2020 agreement. Saudi Arabia, which has managed to hold the OPEC+ alliance together, will not want to upset that cohesion when the time comes to accommodate the two outliers. The latest demand forecasts will make the task that much easier.
is a non-resident fellow at the Arab Gulf States Institute in Washington, a contributing editor at MEES, and a fellow at the Energy Institute.
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