Heal Me - OPEC+ Supply Management Faces Tests as Crude Oil Market Recovers

Much like the world at large, the crude oil market has been healing from the ravages of COVID-19. Overall, market conditions are far better than they were in April 2020, when global oil consumption, crushed by pandemic-related lockdowns, slumped to 80.4 MMb/d, a 17% decline from the start of last year and a 20% drop from April 2019. Demand has been rebounding in fits and starts for a full year now — recovering from downturns is what markets do. But this recovery has gotten a big assist: 10 members of the Organization of the Petroleum Exporting Countries (OPEC), acting in concert with 10 non-members, have restrained crude oil production in a program unprecedented in scale and duration. Now, oil prices are high enough to revive activity by some producers outside the so-called OPEC+ group. For at least the rest of this year, in fact, the market looks like a steel-cage match between crude supply subject to coordinated management and supply governed only by raw market signals. Today, we look at oil-market projections from three important agencies and estimate demand for oil not supplied by the OPEC+ exporters.

Because markets always look ahead, forecasts get close attention. Yet conditions in the oil market are especially hard to predict. The market is huge and complex, susceptible to surprises like hurricanes and conflicts that disrupt production and recessions that reduce demand. Predictions about supply and consumption are almost impossible to get right, even in normal times. As we blogged about in Crazy, though, times have been far from normal. Just over a year ago, a new dimension of unpredictability was painfully clear: a devastating coronavirus to which governments responded with lockdowns and border closures. The resulting blow to oil demand contributed to that staggering drop in the NYMEX crude price to a day’s close of -$37.63/bbl. Although the price turned back positive the next day and partly reflected paper-market timing anomalies (which we explained in One Way Out), the negative value of an international price marker surprised most analysts and underscored how ill the market had become.

Despite the forecasting challenges, someone has to make predictions about the global oil market (although the agencies that do so tend to call their outlooks “projections”). As we pointed out in Everybody Wants to Rule the World, three closely watched projections come from the International Energy Agency, the U.S. Energy Information Administration, and OPEC. Each of these entities publishes a monthly oil-market outlook for the current year and — eventually — the following years. (EIA is the only agency making 2022 projections this early in the year.) And each of their reports is rich with data useful to analysts.

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