For over a year, Covid-19 has steamrolled global energy markets. The last year has provided numerous opportunities to appreciate the resiliency of the global crude oil industry, with more than a few surprises along the way. As the world looks one year ahead, the continued recovery in oil fundamentals looks to be on track. Today’s Energy Market Insight will look back at the last year of global oil supply and demand, as well as looking further down the path of the gradual global rebalancing.
The chart below shows the change in global liquids demand relative to 4Q 2019. In the first and second quarter of 2020, lockdowns led to the rapid decline in consumption of oil. Since 2Q 2020, global liquids demand has recovered more than 11 MMb/d, with most of that recovery focused in non-OECD countries, specifically Asia. Currently, China is expected to drive non-OECD demand to near parity with pre-pandemic levels by the end of 2021. However, continued struggles with the Covid-19 pandemic is expected to lead to continued depressed demand in the western hemisphere. This is driven by one primary culprit: jet fuel. Among OECD nations, gasoline, diesel, and gasoil are expected to or near pre-pandemic levels by the end of 2021. Jet fuel demand, on the other hand, is still expected to be more than 20% below pre-pandemic levels at the end of the year. While jet fuel demand has certainly recovered from falling nearly 70% in May 2020, there is still a long road to full recovery for the global travel industry.
As global demand was crashing in 2020, a dispute amongst OPEC+ producers led to an April spike in global production and, famously, contributed to WTI prices turning negative midway through the month. The resulting market shock of plunging demand and surging OPEC supply resulted in negative WTI prices as storage capacity was pushed to the brim. In response, most US oil producers shut in a portion of a production and at its peak, more than 4 MMb/d of US production was curtailed. Ultra-low prices and shut-in production set the stage for numerous bankruptcies throughout the year. By the end of April, OPEC+ agreed to a record supply curtailment deal and US producers slowly worked shut-in volumes back into the market through the summer.
In the year ahead, BTU Analytics models that US and Canadian production will remain 2 MMb/d below pre-pandemic levels for much of the year. Only by 4Q 2021, when fundamentals are expected to catch up to current price strength, will US producers turn back towards growth. At the same time, though, OPEC+ is expected to add back curtailed production, which BTU Analytics expects to keep a lid on prices throughout 2021, despite the recent run up.
Throughout a tumultuous 2020, oil producers around the globe have been forced to hit the reset button on their operations and how they think about growth, most notably in the US. BTU Analytics expects that the shift in how US E&Ps talk about cash flow and reinvestment will drive production to be largely flat in 2021, despite WTI prices being above $60/bbl for the past week. However, as global demand continues to improve throughout the year and fundamentals improve, US companies may be tempted to add activity to capture any pricing strength. Doing so could put pressure on prices heading into 2022, just as OPEC+ is set to unwind its current production curtailment deal. To see what BTU Analytics forecast for oil prices in the years ahead, request a sample of the Oil Market Outlook today.