Oil 2021 Outlook – Oversupply and Lower Demand




Oil 2021, an analysis by the International Energy Agency (IEA), explains why the pandemic caused the collapse in demand for oil in 2020, and why it may never return to ‘normal’.

Our behaviors as individuals and nations have changed due to COVID-19, and the restrictions placed on us during this time. There has also been a movement within governments around the world to accelerate the lowering of carbon emissions, causing a huge drop in oil demand over the next six years. This in turn has caused turmoil among oil-producing countries and companies, who need to make decisions regarding any new exploration and tapping existing resources that may only add to the surplus they have already.

There is an inventory surplus built up over the past year that is being worked off, and global oil stocks, minus any strategic reserves, will gradually return to pre-pandemic levels in 2021. Meanwhile, governments are looking at the recovery as a catalyst to lower our carbon footprint, especially if said governments do follow through with stricter policies that hasten our implementation of so-called clean energy.

With this in mind, oil producing-countries and companies are in a quandary. Leave resources sitting in the ground, or create new capacity that may sit idle for however long? Let’s say you and me, and motorists around the world, don’t buy into this, and all these experts fail to see the demand for oil and gasoline on the rise once again. This would leave the producers in a shortfall, and we would have another oil crisis, with geopolitical ramifications, and supply shortages to follow.


Globally, oil demand is forecast to be a record 9.3 million barrels per day (mb/d) lower in 2020 than it was in 2019, as COVID-19 brought mobility to a screeching halt in 187 countries. The second half of 2020 should show a gradual recovery, as vaccinations increase and our activity levels rise, but demand is still not expected to reach pre-pandemic levels before years end.

What we can’t account for is the speed of the recovery, and how uneven it will be geographically, between sectors, and for various products. Gasoline demand is unlikely to return to 2019 levels, as fuel efficiency and the movement towards more electric vehicles continues to offset any growth in consumption. Even as we see tens of thousands of Americans returning to the skies, aviation fuels are slowly expected to return to 2019 levels by 2024, and continuation and growth of online meetings could affect business travel indefinitely.


Investment in the oil industry and expansion plans have been curtailed, as companies spent 1/3 less at the start of 2020, and 30-percent less than they had in 2019. In 2021, only a marginal rise in investment is expected. Supply growth worldwide is being constrained, with spending cuts and project delays. World oil production capacity has been reset to 5 mb/d by 2026, and unless there’s action by developed countries, we’ll be 5.2 mb/d short by 2026 to meet the demand rebound.

Half of the increase is expected to come from the Middle East, primarily from existing capacity. Sanctions against Iran may require Saudi Arabia, Iraq, the UAE, and Kuwait, to produce oil at or near their record highs. This is a change from when the U.S. dominated world supply growth, and our investment and activity level will only increase when prices rise. The outlook for the oil industry is for spending discipline, better cash flow, deleveraging or reducing debt, and increasing returns for their investors.

According to the IEA, passenger car oil usage will peak in the late 202os, and during the 2030s, increase an average of only 0.1 mb/d a year, with no peak overall due to continued use by the petrochemical, trucking, shipping, and aviation industries. However, a shift in policies will lead to a peak in global oil demand in the next few years, as it drops more than 50 percent in developed nations between 2018-2040, and 10 percent in developing countries.

[Images: International Energy Agency]

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