The oil market outlook: a speedy recovery

Crude oil prices have recovered from their COVID-19 slump, driven by firming demand and continued production restraint by OPEC and its partners (OPEC+).  As demand gradually returns to pre-pandemic levels and OPEC+ raises production, crude oil prices are expected to average $56/bbl in 2021 and $60/bbl in 2022. Risks to the outlook include a more prolonged pandemic, a breakdown of the OPEC+ agreement, and the response of U.S. shale.

OPEC+ production cuts continue to support prices

The recovery in prices has been largely due to continued production restraint by OPEC+. While the group has increased production since the start of 2021, this has been more than offset by Saudi Arabia voluntarily cutting an extra 1 million barrels per day from February 2021.

Crude oil consumption gradually recovering

Crude oil consumption continues to slowly increase after plunging 9% in 2020. Gasoline and diesel have mostly returned to pre-pandemic levels, but jet fuel consumption remains considerably lower as air travel has been slower to recover. 

Global inventories returning to normal

As a result of the pickup in oil consumption and continued restraint in production, global oil inventories have fallen. While they remain above their pre-pandemic levels, this may be due in part to increases in strategic stockpiles. 

Oil price forecast depends on pandemic containment

Oil demand growth estimates have been revised upward recently, reflecting the improved economic outlook and policy support measures. But the expected recovery in demand depends on the pandemic being successfully contained.  Renewed outbreaks and lockdowns could extend the weakness in oil demand and lead to lower oil prices.

U.S. oil production could surprise in either direction

The U.S. rig count has risen alongside oil prices and is now more than double its August low.  While a further increase in the rig count will be needed before production starts to rise, the U.S. shale industry has repeatedly proved more innovative and resilient to price collapses than expected.