The 2021 Oil Price Rally Is Far From Over

Stocks Draw As Demand Rebounds

On the demand side, improving economies and more mobility have boosted global oil consumption in recent months, resulting in inventory drawdowns that have brought global stock levels below previous norms.

Commercial oil stockpiles have plummeted back below pre-COVID five-year norms in both the United States and the OECD developed nations as a whole, according to Reuters market analyst John Kemp, more than reversing the massive buildup seen in the spring and summer of last year.

Commercial crude oil stocks in the United States were 427 million barrels as of the most recent reporting week, almost 6% lower than the five-year average for this time of year. According to the latest EIA statistics, gasoline stocks were roughly 2% lower than the five-year average, distillate fuel inventories were 9% lower, and propane/propylene inventories were a huge 21% lower than the five-year normal for this time of year.

The International Energy Agency (IEA) reported last week that commercial inventories in the OECD were 162 million barrels below the pre-COVID five-year average in August. On-land industry stockpiles decreased by another 23 million barrels in September, according to preliminary statistics from the United States, Europe, and Japan.

The estimated Q3 refined product balances "reveal the biggest decrease in eight years," according to the IEA, "which explains the substantial improvement in refinery profits in September despite much higher crude prices."

The agency stated that the energy crisis in Europe and Asia may raise global oil demand by 500,000 barrels per day (BPD) compared to a “normal” market without a natural gas and coal shortage, boosting its global oil demand projections for 2021 and 2022.

Supply Lags Demand As OPEC+ Keeps Market Tight

Despite the summer COVID flare-ups in the United States and Asia, demand has returned, but supply increases to the oil market have lagged behind demand growth.

The first was Hurricane Ida, which cut off U.S. oil supplies from the Gulf of Mexico from late August through early September. Because a Shell-operated platform will be down until the end of 2021, supply will not restore to full capacity until early next year.

At the same time, the OPEC+ cartel keeps the market tight by adding just 400,000 bpd to its overall supply each month. Despite appeals from the United States and other oil-consuming countries to open the taps and lower prices, and despite the energy crisis, which has prompted utilities to ramp up oil-fueled power generation in the face of record-high natural gas costs, driving increased demand for oil products.

In its decision to continue to reverse only 400,000 bpd per month of their cuts, OPEC+ leaders cite projected surplus next year and the need to look beyond the next two months.

Last week, Saudi Energy Minister Prince Abdulaziz bin Salman effectively ruled out the possibility that the coalition would respond to the recent increase in oil prices by adding more production than anticipated.

"We need to look past the tip of our noses." Because if you do that and factor in '22, you'll wind up with a large number of overstocks at the end of '22," he remarked on Thursday.

Furthermore, output statistics show that OPEC+ is producing considerably below its collective production cap. According to Bloomberg, if all members of the alliance had adhered to their individual production limitations in September, the group's aggregate output would have been 747,000 bpd more than it was.

At least for the time being, it appears that OPEC+ is unconcerned with demand destruction at $85 oil. The group's executives emphasize the significance of a longer-term vision and market stability, anticipating more production in 2022 from both their own wells and the US shale sector, which looks to be keeping its CAPEX discipline despite oil prices near $80.

‘Blowout’ Backwardation Points To Even Higher Oil Prices

However, supply remains tight at the end of 2021, and backwardation—a crucial sign of a tightening market—between the December 2021 Brent contract and the December 2022 Brent contract has just surged to almost $8 per barrel. According to Refinitiv Eikon statistics quoted by Reuters, this is the highest 12-month Brent backwardation since 2013.

In its Oil Market Weekly report last week, Japanese MUFG Bank stated, "Energy crunch is carving out a USD80/b oil bottom."

The bank's research team said, "The explosion in Brent crude time spreads in recent trading days suggests that the route to further higher oil prices remains strong."