Increased demand projections necessitate the use of vaccinations to facilitate travel in the months ahead.
Covid-19 vaccine roll-outs would need to stimulate travel and economic development if forecasted increases in oil demand are to be justified.
The International Energy Agency, the United States Energy Information Administration, and the Organization of the Petroleum Exporting Countries all increased their demand estimates for 2021, citing the rapid roll-out of coronavirus vaccines, especially in the United States, and an improving economic outlook. However, their more optimistic outlook will take time to materialize.
The three agencies increased their demand estimates for the year by between 150,000 and 200,000 barrels per day from March levels (see chart below).
Each of the three agencies raised their forecasts for oil demand in 2021.
It was OPEC’s fourth consecutive rise in its estimate of oil demand this year, which is now 570,000 barrels per day higher than in December. The IEA increased its outlook for the second time this year, following a much smaller increase last month, but it remains 220,000 barrels per day lower than it was at the end of last year. It was the EIA’s first upward revision to its 2021 demand forecast since August, although the forecast remains 510,000 barrels per day lower than in December.
Despite this year’s more promising outlook for annual average demand rate, the immediate future is not nearly as bright. OPEC and the EIA also lowered their demand estimates for the current quarter, with only the IEA raising its outlook from a month earlier (see chart below).
A More Promising Future
Forecasts for increased oil demand are being boosted by better expectations for the second half of the year.
All three companies attribute their improved outlooks to a stronger second-half demand recovery, fueled by the accelerated roll-out of the Covid-19 vaccine in the United States and a few other nations, as well as more optimistic economic forecasts. However, there are still vast areas of the world where vaccination is only getting started or has not yet begun. This creates a massive pool of potential hosts for the virus to begin to mutate, potentially impairing the efficacy of current vaccines. The appearance of novel, vaccine-resistant coronavirus variants may also jeopardize the recovery.
Though road travel and domestic flights are increasing in countries such as the United States and China, international long-haul and even short-haul flights are lagging. It is far from certain if the anticipated boost to holiday travel will materialize during the Northern Hemisphere’s summer months in the third quarter, though the balance of expectations among the three agencies is clearly shifting in a more optimistic direction.
The upward revision to OPEC’s forecast is surprising at first glance. Just two weeks ago, the group lowered its forecast for 2021 demand growth, from 5.9 million barrels per day to 5.6 million barrels per day, and lowered its forecast for the current quarter. It revised its demand estimates upward again in its latest survey, with year-on-year growth now pegged at 5.95 million barrels per day (see chart below).
After lowering its demand forecast two weeks ago, OPEC increased it further in its most recent survey.
The rise in the first quarter reflects a similar increase in the producer group’s 1Q20 demand estimate, resulting in unchanged year-on-year growth. Demand growth in the second quarter has been reduced by 520,000 barrels per day from last month’s estimate, but it remains above levels seen two weeks ago. However, the group’s outlook for the second half of the year has improved significantly.
The OPEC+ group’s decision at the start of April to begin unwinding its output cuts next month reflects growing optimism about demand recovery. However, as the IEA warns, herd immunity will take several more months to achieve, even in countries with aggressive vaccination campaigns, and if social interactions increase too quickly, local spikes in Covid-19 cases could hit demand again.