Oil price forecasts scrambled by COVID-19 uncertainty

Oil-price forecasters mostly focus on two things: supply and demand. They watch the Middle East, follow global politics, track industrial activity and other economic indicators. All of which can affect supply and demand. Now they also watch medical charts for COVID-19 infection rates.

The market players of oil producers, buyers, traders and investors worry that rising infection rates could slow down the world economy and knock down the recovery in consumption of crude oil. That would shift global oil supply — which OPEC+ is steadily increasing — out of balance if demand pulls back.

That worry of too much crude and not enough demand led to a 10 percent drop in oil prices in mid-August, before the market took its temperature again, felt better and recovered by the end of the month to around $70 per barrel for Brent crude.

Since then, the resurgence of COVID-19, particularly in Asia, has prompted renewed nervousness as OPEC+ continues with its plan to bring back 400,000 barrels per day of production every month through fall 2022.

And now, the latest reports from the Organization of the Petroleum Exporting Countries and the International Energy Agency are adding to the market skittishness.

OPEC analysts presented a report Aug. 31 that said global markets could run a supply surplus next year. Due to weakening demand projections, the analysts forecast supply could exceed demand as soon as January, adding more barrels back into storage which the OPEC+ alliance has been working all year to reduce.

The OPEC base case now shows global crude stockpiles building to 3.2 billion barrels by the end of 2022, about 10 percent greater than the 2015-19 average. An even more pessimistic scenario from the analysts of COVID-induced lower demand shows 3.6 billion barrels in storage by December 2022, or the most in several years, other than 2020 when storage tanks filled up and crude was parked aboard tankers at sea.

The OPEC analysts forecast global supply exceeding demand by more than 100 million barrels per month January through May 2022, then continuing at a lower level the rest of the year.

“Unless oil demand turns out much stronger, or production outside the OPEC+ group much weaker than OPEC’s analysts predict, the time will soon come when the members will again have to contemplate cutting, rather than raising, output,” Julian Lee, an oil strategist for Bloomberg, wrote in a commentary Sept. 4. Lee previously worked as a senior analyst at the Centre for Global Energy Studies, a think tank headquartered in London.

“When that happens,” Lee said of the prospect of production cutbacks, “expect the old (and new) divisions (within OPEC+) to emerge again,” and the alliance returning to “long and difficult” meetings between the 23 producing nations led by Saudi Arabia and Russia.

The International Energy Agency sees it the same as OPEC analysts. The IEA has cut its oil demand forecast for this year, and predicts supply may outpace demand by next year.

The agency said global oil demand “abruptly reversed course” in July due to “the worsening progression of the pandemic.”

The spreading Delta variant of the coronavirus — coinciding with OPEC+ continuing its plan to bring back production — will eliminate “lingering suggestions of a near-term supply crunch,” the IEA said.

“Growth for the second half of 2021 has been downgraded more sharply, as new COVID-19 restrictions imposed in several major oil-consuming countries, particularly in Asia, look set to reduce mobility and oil use,” the IEA said in its monthly report.

“We now estimate that demand fell in July as the rapid spread of the COVID-19 Delta variant undermined deliveries in China, Indonesia and other parts of Asia.”

It was just two months ago that Goldman Sachs and others were predicting oil would reach $80 per barrel by the end of this year. That’s looking less likely.

“The scale could tilt back to surplus in 2022 if OPEC+ continues to undo its (production) cuts and producers not taking part in the deal ramp up in response to higher prices,” the IEA said in its report.

OPEC+ is prepared to pause or even reverse its scheduled output increases if necessary to keep supply and demand in balance, Saudi Energy Minister Prince Abdulaziz bin Salman said in August.

One number that may help OPEC+ avoid any change in its production plans is that the alliance is actually pumping about 10 percent less than its overall quota as some members — notably Angola and Nigeria, and somewhat Russia — are having problems fulfilling their allocations due to deteriorating production capacity from a lack of investment or technical disruptions.

Still, some OPEC nations are concerned.

“The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 increase,” Mohammad Abdulatif al-Fares told Reuters on the sidelines of a government-sponsored event in Kuwait City just two days before OPEC+ decided Sept. 1 to proceed with the scheduled production boost.

The oil-producing nations should be cautious about oversupplying the market, Fares said.

OPEC+ last year implemented a record output cut of 10 million barrels per day, equating to about 10 percent of world supply, when energy consumption plunged because of travel restrictions and national lockdowns to counter the spread of COVID-19.

The alliance has been slowly restoring production and is scheduled to bring back all of the crude output by fall 2022. Unless COVID changes the plan.

“It feels like the Delta variant has gained control of the oil market and the narrative here,” said analyst Patrick O’Rourke, with ATB Capital Markets in Calgary. “We were on the cusp of the economy reemerging and the beginning of international travel. And the brakes have been completely pumped on that,” he was quoted in the Calgary Herald on Aug. 21.

“The OPEC+ group faces a real challenge in the months ahead from needing to reduce supply just as many members are itching to open their oil taps some more,” Bloomberg’s Lee wrote in his commentary last week.

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He can be reached at [email protected].

09/08/2021 - 10:02am