World oil markets have rebounded from the massive demand shock triggered by Covid-19 but still face a high degree of uncertainty that is testing the industry as never before, according to a new (International Energy Agency) IEA report.
The forecast for global oil demand has shifted lower, and demand could peak earlier than previously thought if a rising focus by governments on clean energy turns into stronger policies and behavioural changes induced by the pandemic become deeply rooted, according to Oil 2021, the IEA’s latest annual medium-term market report published on Wednesday.But in the report’s base case, which reflects current policy settings, oil demand is set to rise to 104 million barrels a day (mb/d) by 2026, up 4 percent from 2019 levels.
“The Covid-19 crisis caused a historic decline in global oil demand – but not necessarily a lasting one. Achieving an orderly transition away from oil is essential to meet climate goals, but it will require major policy changes from governments as well as accelerated behavioural changes. Without that, global oil demand is set to increase every year between now and 2026,” said Dr Fatih Birol, the IEA’s Executive Director. Asia will continue to dominate growth in global oil demand, accounting for 90 percent of the increase between 2019 and 2026 in the IEA report’s base case. By contrast, demand in many advanced economies, where vehicle ownership and oil use per capita are much higher, is not expected to return to pre-crisis levels.
On the supply side, the heightened uncertainty over the outlook has created a dilemma for producers. Investment decisions made today could either bring on too much capacity that is left unused or too little oil to meet demand. Only a marginal rise in global upstream investment is expected this year after operators spent one-third less in 2020 than planned at the start of the year.
In the IEA report, the world’s oil production capacity is projected to increase by 5 mb/d by 2026. At the same time, the historic collapse in demand has resulted in a spare production capacity cushion of a record 9 mb/d that could keep global markets comfortable in the near term.
To meet the growth in oil demand to 2026 in the IEA report’s base case, supply needs to rise by 10 mb/d by 2026. The Middle East, led by Saudi Arabia, is expected to provide half that increase, largely from existing shut-in capacity.