Lately the oil market has been plagued by pessimism over how quickly demand can recover, as a result of the recent growth in Covid-19 infections, the related lockdowns and restrictions in several countries, and vaccination campaign hiccups.
Positive demand remarks is all the market is waiting for to register a bullish reaction and the IEA forecast for a coming demand rise in the second part of 2021 fueled the oil price gains today.
We estimate oil demand in the first half of the year to stand at 93.2 million bpd, but then forecast a takeoff towards 97.6 million bpd in the second part of 2021.
Positive gasoline consumption trends in the US were offset by extended lockdowns in Europe and new lockdowns in India. The impact of restrictions is already visible on traffic levels in India, but we are yet to observe any significant drop thus far in April after fuel consumption had reached a 2-year peak in March 2021.
Stricter measures will hit gasoline, diesel, and jet fuel demand recovery, but refineries may still decide to keep runs high in anticipation of a summer boom.
Despite the continuous set of new hurdles in navigating the vaccine and lifting of lockdowns, we still believe that overall, optimism for economic recovery will drive oil demand to finish 2021 strong and average 95.4 million bpd.
From full openings in the US to school closings in France and lockdowns in India, the demand picture is again coming into the centerfold, but the smattering of contradicting trends globally has made it difficult to remain consistently optimistic.
Some market players may be waiting out this oil demand lull and hoping to cash in later at higher prices when demand is verifiably back in full swing.
But refineries, which have to plan throughput schedules in advance and are coming off a very rough year, should be eagerly anticipating the promised comeback. We thus expect many buyers to hold fire until the next clear market impetus arrives.
Looking at the US, where oil production is expected to rise later this year, adding pressure to global balances, oil traders eyes are on drilling and fracking activity, changes in which can also affect prices and forecasts.
With the strong rebound in US oil fracking activity since the winter slowdown in February, the inventory of drilled uncompleted wells in major tight oil regions (Permian, Eagle Ford, Bakken, Niobrara and Anadarko) saw another month of strong decline in March.
The total horizontal DUC inventory in oil regions declined to about 4,700 wells last month, as fracking outpaced drilling by approximately 160 wells. Out of the 4,700 wells, almost 1,900 consist of so-called dead DUCs – wells drilled more than two years ago – which remain in an uncompleted state.
Historically, we note that DUCs rarely contribute to frac activity after an initial period of 18-24 months, though occasional completions still occur on a small percentage of wells drilled more than two years earlier.
The current “live” DUC inventory is estimated at about 2,820 wells, the lowest level since the last quarter of 2016, representing a decline of some 32% from the inventory peak of 4,160 wells seen in June 2020.
With further rig additions in the first half of April, we estimate that the pace of drilling might soon catch up with the pace of fracking, thus leading to a stabilization of inventory levels. Based on the latest data, we still do not anticipate full normalization of operations until late this year.
