Optimism grows over recovery in oil demand

OPEC and its partners are betting on a significant increase in oil demand over the coming months as member states prepare to increase oil production. OPEC, Russia and their allies plan to increase oil production by 2.1 million bpd as early as July this year, suggesting the confidence they have in a market rebound. The organization’s production cuts of 7 million will be significantly mitigated each month by July.

Saudi Arabia is also expected to ease its voluntary production cuts to increase output by 1 million bpd by July.

The announcement of the easing of restrictions comes unexpectedly as the oil industry once again suffers from increased Covid-19 restrictions as Europe and parts of Latin America enter a third wave of the pandemic.

Oil prices fell to the lowest in nearly two weeks as European lockdown measures continue to be extended, leaving the market uncertain about demand trends ahead. New York futures fell 4.6% on Monday, from $64.86 a barrel on April 1 to $62.15, sending oil prices below the 50-day moving average for U.S. crude.

OPEC hopes prices will remain generally high as production increases, relying on the international market to absorb higher crude output by the summer months. However, he will be struggling with travel restrictions, closed businesses and the new normal of working from home. Related: Iran’s return to oil markets unlikely to cause price crash

However, the optimism around the rollout of the vaccine continues, as the UK has administered the first vaccine to almost half of the population, and the United States at more than 30% of the population. While vaccination programs in the rest of Europe and North America are progressing at a slower pace, it is still hoped that many countries will catch up by the end of 2021.

Vitol, the world’s largest independent oil trader, said this week it expects demand for oil to rise over the next decade but warns the recovery in jet fuel will be slower. While some oil sectors will remain stagnant, others are expected to grow, including light ends used in manufacturing.

Platts Analytics is also optimistic about the 2021 rebound, anticipating oil demand growth of 5.9 million bpd this year, compared to the 9 million bpd decline seen in 2020. The company expects demand to rise steadily before plateauing at around 113.5 million bpd in the late 2030s.

The increase in demand will mainly come from Asia, as the energy needs of China and India are steadily increasing while already developed markets, such as Europe and North America, are expected to stagnate.

OPEC+ is increasingly looking to India and its oil refiners, as Saudi Arabia hopes to forge strategic relations with one of the fastest growing downstream markets in the world. At present, the Gulf Arab states account for around 20% of India’s total import bill, which is dominated by oil and gas.

As Covid-19 restrictions continue to hamper oil demand, optimism around the vaccine rollout as well as increased demand from emerging markets suggest OPEC’s plan to boost production will be greeted with enthusiasm.

By Felicity Bradstock for Oilprice.com

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