In its February Short Term Energy Outlook (STEO), the EIA forecasts this month’s world oil consumption at 96.7 million barrels per day (mbpd).
The oil supply, however, is much lower, only 93.6 mbpd, with the difference of 3.1 mbpd of necessity being drawn from crude oil and refined product inventories.
By historical standards, a sustained draw of 3 mbpd is large, and we would expect prices to be rising under such circumstances.
The EIA sees demand continuing to recover at a good pace to mid-year, with July world oil consumption forecast at 98.2 mbpd (but still about 4 mbpd below ‘normal’). This incremental demand is being materially supplied by two sources, Brazil and OPEC.
We might accept Brazil’s crude oil production growth as given, allowing that the timing might be off by a month or two. The pivotal question is instead OPEC’s intentions.
The EIA uses a volume (or demand) driven model, implying that OPEC will passively increase production to meet demand, and thereby keep oil prices low.
But why would OPEC do this? If OPEC simply maintained current production levels, the world would be 3.5 mbpd short of supply by mid-year. A shortfall of 3.5 mbpd — 3.6% of global consumption — is a lot.
It would rapidly drain remaining excess inventories, leaving only oil prices to mediate between supply and demand just as the world economy is showing both strength and momentum as the pandemic ends.
In other words, in the coming months consumers will be prepared to compete for the available barrels of oil, and that should push oil prices up sharply.