Oil demand is expected to take two to four years to return to 2019 levels, depending on the duration of lockdowns and the pace of GDP recovery, forecasts by McKinsey and Company, a leading management consultancy firm, shows.
“Based on our Global Energy Perspective reference-case demand insights, current OPEC+ intervention will be sufficient to help balance the market in 2021, with prices remaining at a sustained level of $50 to $55/bbl through to 2025,” the analysts said in a report.
According to the Energy Information Administration (EIA), total oil production averaged more than 100.61 million barrels per day (b/d) in 2019. OPEC said it expected global oil demand in 2021 to increase by 5.9 million barrels per day year over year to average 95.9 million bpd.
The report said that if GDP growth recovers faster than expected, the world may see a near-term price increase at more than $55/bbl.
However, if demand recovers slower than expected or if OPEC+ stops cutting output, prices could be depressed or highly volatile for the next three to four years.
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Crude oil demand has partially recovered since April 2020 but still ended the year approximately 9 million barrels per day (MMb/d) below the 2019 level, with continued COVID-19-related lockdown measures in January 2021 keeping it around 6 MMb/d lower than January 2019.
Supply remained robust until April 2020 and then dropped by 13 to 14 MMb/d in May, driven by OPEC+1 cuts and shut-ins (that have mostly returned to the market), thus showing the willingness of OPEC+ to continue interventions.
The market saw an oversupply of approximately 20 MMb/d in April 2020, pushing Brent prices to $18 per barrel of oil (bbl) for the month, before recovering to $50/bbl by the end of the year.
OECD commercial inventories remain at high levels and, although we have seen draws over the past months, they are still 150,000 barrels above pre-COVID-19 levels.
The consultants found that long-term equilibrium oil prices have decreased by $10 to $15/bbl compared with pre-COVID-19 outlooks, as driven by a flattening cost curve and lower demand.
Under an OPEC-control scenario, in which OPEC maintains its market share, we see a $50 to $60/bbl equilibrium price range in the long term, fueling 10 to 11 MMb/d US shale oil and 11 to 13 MMb/d deepwater production from pre-financial-investment-decision (FID) projects,” the analysts said.
The analysts said that while most of the offshore-oil-producing regions will be under pressure in an accelerated energy-transition scenario, the sector will still require new production of nearly 23 MMb/d to meet demand after 2030.
Investments in oil capital expenditures are expected to gradually recover but remain below the pre-COVID-19 outlook and a slow rebound in shale and offshore in North America is expected.
The analysts also found that after more than 30 years of stable growth of more than 1 percent per year, oil demand growth slows in the late 2020s and peaks in 2029.
“Various energy transition drivers could cause the peak to occur six to ten years earlier,” the report said.
McKinsey analysts also found that by 2040, exploration and production companies need to add 38 MMb/d of new crude production from unsanctioned projects to meet demand.
Most new supply is expected to come from offshore and shale resources and the sector will still require new production of nearly 23 MMb/d to meet demand by 2040. Demand in a 1.5°C pathway will force shut-ins, the report said.
