Bumpy oil demand disguises strong underlying recovery

OPEC Navigates Uneven Oil Demand Recovery Amid Global Shifts

The patchy pick up in oil demand shows little sign of changing. This month oil deliveries to the Far East recovered but only after dipping in April. It’s likely to stay jittery for a while as regions and industries emerge from the pandemic at differing rates. 

The month-to-month volatility can be distracting and disguise the underlying trend which is unambiguously upwards. OPEC expects demand to reach about 96.5 million barrels per day (mln bpd) on average this year after plunging to 90.5 mln bpd last year during the pandemic.

The previous year, 2019, was the last time oil demand reflected normal economic activity and was around 100 mln bpd having moved steadily higher in the previous few years. So this year oil demand is bouncing back - in it’s own volatile way - like it always does after major disruptions. 

Globally oil discharged by Very Large Crude Carriers (VLCCs) rose to 478 vessels this month having dipped to 435 in April, according to Signal Ocean data. While deliveries in the Far East - which is a barometer of global demand - jumped back to 368 vessels from 323 in April. There was no significant change in deliveries to China but higher deliveries to Japan, Korea, Malaysia and Singapore.

Global deliveries are bumpy but stronger this month

Despite being only slightly higher deliveries overall the geographic distribution of deliveries to China shifted in May. More cargoes discharged in the industrialized north and less to the southern and central areas compared to April deliveries.

China deliveries are steady but up in the northern region

OPEC did well to hold its nerve last month. It managed to see past the discouraging dip in April deliveries and the “noisy” month to month data. It agreed to keep in place an agreement to slowly increase over the coming months. That agreement effectively begins the delicate process of reversing big production cuts made last year during the pandemic.

The Russian Energy minister - a key ally of OPEC - said last week that excess oil stocks were being reduced because the market was in deficit. “The oil prices are stable ... meaning that the market is balanced with a slight excess of demand over supply,” said Alexander Novak talking to reporters in Moscow.

OPEC has enjoyed a period of close cooperation since the pandemic began last year. The roughly 9% to 10% drop in oil demand brought the group closer together, bound by a mutual worry that prices might slump and then stay low. The compliance with agreed cuts has been well above 100% recently which is unusual for the sometimes disorderly group. 

As demand recovers further a challenge for the sometimes fragile oil cartel will be maintaining that collective cohesion and discipline. It will also face external competition from the United States and other producers in the Atlantic Basin. 

The United States is a unique competitor because shale production is unusually responsive and can boost production and exports quickly when oil prices rise. In a prescient move Vitol - the world’s largest independent oil trader - recently announced that it would invest in the US shale region.

A tantalising - and perhaps more nuanced - glimpse of the recovery in demand can be seen by looking at the deliveries of refined oil products. Gasoline, diesel, petrochemicals and other kinds of refined products are closer to being consumed than the crude oil carried on VLCCs. They are processed oil that is further “downstream” and therefore nearer the point of consumption. 

The number of deliveries of Medium Range 2 (MR2) tankers carrying specified refined oil products and those not yet identified - or not set - has been gently trending upwards in recent months, according to Signal Ocean data. 

Oil product deliveries move gently higher

The detailed Signal Ocean data confirm some underlying trends in different types of products. For instance, Jet Fuel deliveries have shrunk with the reduction in air travel. While diesel and gasoline deliveries in some areas have been buoyed by higher levels of ground transportation as travel restrictions begin to ease in some Western countries.

The overall picture painted by the larger VLCC vessel movements is that oil demand is recovering although month to month figures can be volatile. The smaller MR2 class of tankers reveal that the recovery is uneven with different geographies and oil types showing widely differing behaviours.

Oil market recoveries are usually bumpy. But this recovery is bumpier than ever before. OPEC has done well. It has choreographed oil supply with impressive dexterity and accuracy. Emerging from the chaos it may even have become the organisation it has always yearned to be. A responsible and agile custodian rather than an adversary of the Western consuming nations. Last month it began to tentatively open the taps again after last years slump.

However, OPEC is like a tea bag. It always works better when it is in hot water. Crises make it operate more effectively. And then it lapses. This is a repetitive behavioural pattern that is also a refuge. Importantly, a refuge that prevents more fundamental change. And with the threat of climate change looming, more permanent change is what it needs.

The world is moving away from oil. To avoid its own extinction event OPEC will need to carefully consider it’s turbulent past. And what it wants to be. It has faced crises many times over the past 61 years. Usually it has muddled through but without necessarily being able to see the wider context within which it operates. This time feels different. 

Climate change is a complex and global phenomenon. It will favour flexible, enlightened and adaptive organisations. OPEC still has some time. And it will still face oil market challenges. In particular, the distinct possibility of supply tightness in the coming years due to a plunge in investment in oil exploration and production. But this would be a good time to review its ambitions.

The cartel might want to consider reading “The Life of Reason” by the philosopher George Santayana. Written more than a century ago it still resonates today. "Those who cannot remember the past are condemned to repeat it," he famously wrote. Understanding it’s own history might be the only way OPEC can recognise its future opportunities.

Sam Arnold-Forster is an independent analyst. The views expressed are his own and do not necessarily represent those of the Signal Group.

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