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Oil Market Report Summary: August 2021

Demand

Oil demand growth slowed significantly in July 2021 as the resurgence of COVID-19 cases, particularly the Delta variant, hit several major Asian economies. Global demand growth was revised downward for the remainder of the year due to worsening pandemic conditions and data revisions. Non-OECD demand also weakened, especially in July, as new COVID waves led to mobility restrictions. This reversed the strong growth seen in June and muted expectations for seasonal rebound in August. Despite this, 2021-year-on-year demand growth remains strong at 5.3 mb/d on average, but 2022 growth has slowed slightly to 3.2 mb/d.

In the OECD regions, demand recovered strongly but remains about 1 mb/d below 2019 levels in many cases, with the Americas showing the largest relative improvement. Non-OECD demand fell more sharply due to regional outbreaks and travel restrictions. Jet fuel and gasoline cracks improved, reflecting strong summer travel demand and tight crude balances. However, demand faced headwinds from reduced refining activity in some regions and shifting supply patterns in Asia pivoting toward East of Suez grades due to backwardation in benchmark crude.

Key demand highlights for 2021 include an average growth of 5.9 mb/d, with 2022 projections at 3.2 mb/d. This is less than the 5.3 mb/d growth initially forecast earlier in the year. The recovery remains uneven across regions, with Asia experiencing the steepest slowdown due to pandemic pressures.

Supply

OPEC+'s decision to gradually unwind production cuts starting August 2021 marks a significant shift in market dynamics. The agreement to increase output by 400 kb/d/month until September 2022 could tip the market toward oversupply by next year, reversing the deficit concerns that characterized earlier months. Global oil supply increased 1.7 mb/d m-o-m in July to 96.7 mb/d, largely driven by Saudi Arabia ending its voluntary cut and the North Sea recovering from maintenance.

Non-OPEC+ supply is poised for significant growth in 2021 and 2022, with the U.S. shale sector expected to contribute about 60% of the overall gains. Record-high U.S. crude production levels highlight the supply-side strength, which together with OPEC+'s incremental output could outpace demand recovery. Crude inventories are still falling rapidly across OECD and non-OECD regions, contributing to tight crude balances and supporting prices despite higher supply.

The global supply-demand balance showed implied stock draws of 2.3 mb/d in June, reflecting stronger production from non-OPEC regions and weaker demand in key Asian economies.

Refining and Stocks

Refining activity slowed in July as product demand recovered only gradually and maintenance schedules took their toll. Crude runs decreased compared to June due to concerns about high COVID levels, although seasonal factors played a role. Refinery margins improved, particularly for light distillates, but fuel oil and heavy products faced pressure from surging demand and refining constraints.

Inventory levels remain exceptionally low globally. OECD industry stocks fell sharply to 2.9 mb/d below the five-year average, while government-controlled stocks were about 1.2 mb/d below levels. Record-low crude stocks, particularly in China, highlight the tight balancing act in key markets. Product inventories are building tentatively amid seasonality, but overall crude draws continue to signal supply-demand imbalances.

Floating storage volumes, an indicator of crude supply tightness, continue to run at historically high levels, suggesting constraints in delivery logistics despite strong refining activity. The widening backwardation in benchmarks reflects tight inventories and demand surges, contributing to price volatility even as monthly averages may show some recovery.

Prices

Oil prices exhibited high volatility in July, with significant fluctuations due to mixed signals from the market. Brent and WTI prices reached multi-year highs early in the month before falling sharply as concerns about Delta variant impact on demand growth intensified. Physical crude prices, especially in Europe and Asia, showed remarkable strength in cracks despite overall volatility in benchmarks.

At the same time, OPEC+'s supply decisions added uncertainty. While the bloc agreed to accelerate output increases, this risked undermining recent gains in prices as market fears shifted from supply shortages to potential surpluses. The market digested these conflicting signals amid ongoing concerns about both demand destruction from COVID and supply responses from OPEC+.

Jet fuel and gasoline cracks widened strongly, while middle distillates and fuel oil faced more muted gains due to competition from alternative energy sources and global supply excesses developing simultaneously with demand recovery.

Outlook

The report suggests that the oil market is increasingly entering an oversupply phase, particularly from late 2021 onwards, despite ongoing demand improvements. While demand recovers gradually, supply from both OPEC+ and non-OPEC+ sources is ramping up rapidly in response to lower inventories and higher prices.

Demand pathways remain uncertain due to the pandemic trajectory, with OPEC+ likely to prioritize supply-side flexibility over rigid adherence to its production framework. This adjustment marks a shift toward market-based decisions rather than supply discipline, potentially unlocking storage flexibility and addressing imbalances with fewer cuts.

Physical market balances remain tight despite structural shifts, with inventories lingering near multi-year lows and no immediate signals of balanced inventories emerging by August's end. This suggests continued support for prices through at least the coming months.