IEA Forecasts "Lower for Longer" Oil Demand

World oil demand will be “lower for longer” as jet fuel struggles to return to pre-pandemic levels, according to the International Energy Agency’s (IEA) latest report.

“Demand is clearly going to be lower for longer than expected when the supply agreement was concluded in April,” said the IEA’s December 2020 report.

The agency revised downward its previous oil demand forecast by 50Mb/d for 2020. This was followed by a much larger forecast cut of 170Mb/d in 2021 as aviation struggles amid the continuing pandemic. “This is mainly because of another downgrade for jet fuel/kerosene demand, which will account for around 80 percent of the overall 3.1MMb/d shortfall in consumption in 2021 versus 2019,” the report stated.

While demand was predicted to fall, production is rising. Global supply jumped 1.5MMb/d in November “as the US recovered from hurricane shut-ins and Libya built up production,” while in January OPEC+ countries will put another 500Mb/d into circulation following last week’s production agreement. Non-OPEC+ are also expected to add 400Mb/d to the global market next year “after a fall of 1.3Mb/d in 2020,” said the report.

Oil demand has continued its tentative growth over the past few months, having recovered ground from April’s drastic demand drop. As a response, OPEC+ agreed on green lighting the next phase of its production output strategy with January’s 500Mb/d addition. Positive vaccine news also swelled markets in the last few weeks as countries, including the UK, have begun vaccination procedures. All of this will buoy industry hopes moving into next year but recovery remains dependent on low infection rates and the presumption that national governments will not need to impose lockdown measures again. But in Europe and the US, rates are rising again as Christmas approaches. If Europe sees the post-Christmas spike in positive cases that the US experienced after Thanksgiving, mobility could be restricted again.

“We are close to the end of 2020 and Brent futures prices have recently moved above US$50 per barrel for the first time since early March. Indeed, futures markets have moved into a shallow backwardation looking twelve months ahead. On the other hand, physical barrels have only recently traded close to futures prices, underlining the continued uncertainty that COVID-19 is causing oil demand and market stability,” said the IEA noted.

Jet fuel and kerosene, consumed primarily by the aviation industry, is more likely to see a slow, drawn-out recovery as travelers steer clear of long-distance flying due to virus concerns. The International Civil Aviation Organization reported in November that “world passenger traffic fell by 72.8 percent year-on-year in September 2020,” though national travel in Latin American countries had seen a rise.