IEA warns renewed Covid lockdowns will depress oil demand

Global oil demand will be lower in 2021 than previously expected, the International Energy Agency said on Tuesday, as renewed lockdowns to contain the pandemic hit consumption.

The IEA said oil demand would be 600,000 barrels a day lower than previously forecast in the first quarter of 2021 and 300,000 b/d lower for the year as a whole, although it still expects a strong recovery in the second half of the year as vaccinations accelerate.

“It will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales,” the IEA said in its closely watched monthly report.

“[But] the global vaccine rollout is putting fundamentals on a stronger trajectory for the year.”

Since collapsing early last year as lockdowns and travel bans slashed oil demand, crude prices have been recovering with Brent crude oil, the international benchmark, climbing back above $55 a barrel.

But prices are still $10-$15 a barrel lower than they were before the pandemic despite Opec and allies like Russia enacting record supply cuts to help prop up the market and expectations demand will be stronger in 2021.

The IEA said that while it was lowering its forecast, global oil demand is still expected to rise by 5.5m b/d in 2021 as a whole to 96.6m b/d after falling by 8.8m b/d in 2020. But it is not expected to recover to pre-pandemic levels of around 100m b/d until 2022 at the earliest.

“Vaccination campaigns take time,” the IEA said. “We assume that the [they] will start to have an impact on mobility and transport fuel demand in the second half of 2021.”

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The IEA said it still saw the potential for global oil inventories to decline substantially this year as Opec and its allies have increased the size of agreed production cuts designed to help balance the market and bolster prices. Saudi Arabia announced it would remove an extra 1m b/d of production earlier this month.

The so-called Opec+ group, which has worked together since 2016, may need to start raising production later this year, while under-investment in the industry has led some traders to bet that supply gaps could open up in the coming years.

“Assuming Opec+ achieves 100 per cent compliance with the latest agreement, global oil stocks could draw by 1.1m b/d, or 100m barrels in the first quarter with the potential for much steeper declines during the second half of the year as demand strengthens,” the IEA said.

World oil supply is expected to rise by 1.2m b/d in 2021 after a record fall of 6.6m b/d last year.