Largest ever inventory draw a testament to Saudi Arabia and OPEC+’s success
Our preliminary estimate for 2021 global petroleum inventories shows they were drawn down by close to 400 million barrels during the year. It marks the largest storage draw ever, eclipsing the previous record by a remarkable 60 percent. As a matter of disclosure, this figure does not include the additional 50 million barrels of inventory withdrawn from emergency stockpiles over the same period.
Our forecast for 2021 seeing an outsized inventory withdrawal is not important. What is important, though, is the magnitude of how far the stockdraw exceeded consensus expectations, much of which is reflected by a belief that OPEC+ would see its quota deal implode.
Most of you reading this are likely to recall being bombarded with such perspectives about OPEC+ lacking the wherewithal to rein in its oil production in reaction to the pandemic-induced contraction in demand. In point of fact, that view has been prevalent among market watchers since the historic production deal that was inked back in November 2016; a situation which again saw Saudi Arabia’s leadership prove critical.
Pessimism about OPEC being able to exercise production discipline stretches back to the 1980s and the “quota cheating” that was witnessed after the production ceiling was first instituted in March 1983. When we first started to attend OPEC conferences, a great deal of the cartel’s effort was expended dealing with this problem. The first OPEC conference we attended in 1986 lasted 17 days as the group struggled to work out very small quota adjustments. But, that was then.
The past 21 years have been characterized by very strong quota compliance. Even so, most market watchers have continued to harbor a built-in bias that OPEC producers can not help themselves but to cheat on production ceilings. Many pundits enjoy citing the scorpion and the frog fable and simply assume OPEC members will succumb to base instincts. Even these past 18 months saw commentary belying the group’s better-than 100 percent quota compliance rate. We suppose haters just have to hate.
As we navigate through the 2022 global oil balance, the year is starting off with deep-seated fears that the latest wave of the pandemic will materially disrupt or derail the global economic recovery, and with it, oil demand. So far, the data suggests otherwise. We estimate that global oil demand in November 2021 posted its highest monthly reading since February 2020. Preliminary analyses that we have published to clients also suggested December’s rate further expanded.
If we look back at the situation a year ago, it is notable that the prevalent concern centered on the delta variant and the related fear that the economy and oil demand would not recover — a fear that clearly did not bear out. For this year, as outlandish as this may seem, we think oil market issues will eventually end up centered on spare production capacity as the demand recovery continues to unfold. Timing wise, we see this as becoming a factor in the second half of 2022 when global oil usage begins to seasonally rise.
We expect the world economy to continue normalizing, but we must note again that consensus expectations for a rapid gain in non-OPEC oil production seem misplaced.
We believe this will prove almost as shocking as this past year’s record inventory draw.
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.