Weaker European demand won’t derail our oil forecast - Capital Economics
Energy

Weaker European demand won’t derail our oil forecast

Energy Update
Written by Adam Hoyes

While we have revised down our oil price forecast for Q2 and Q3 this year in response to the OPEC+ decision to ease production cuts, we still think a rebound in global demand will help push oil prices back above $70 per barrel. We expect weaker oil demand in Europe to be offset by a stronger rebound in consumption in the US and elsewhere, keeping the global oil market in deficit for the rest of 2021.

  • While we have revised down our oil price forecast for Q2 and Q3 this year in response to the OPEC+ decision to ease production cuts, we still think a rebound in global demand will help push oil prices back above $70 per barrel. We expect weaker oil demand in Europe to be offset by a stronger rebound in consumption in the US and elsewhere, keeping the global oil market in deficit for the rest of 2021.
  • The resurgence of virus cases, slow pace of vaccinations and extension of lockdowns in the euro-zone have prompted us to push back our forecast for the economic recovery there. (See here.) Our new working assumption is that the majority of economically-damaging restrictions in the euro-zone are lifted during June and July and, as a result, we don’t expect economic activity to begin to rebound again until Q3. Accordingly, we have revised down our forecast for oil demand in Europe over the next few quarters.
  • However, we remain optimistic on the pace of the economic recovery in the US. Our forecast is for the economy to expand by almost 10% annualised in Q2, and by 6.5% over 2021 as a whole, spurred on by a stimulus-induced surge in demand and a continued relaxation of restrictions.
  • This view is corroborated by the latest high-frequency data. Mobility appears to be recovering faster in the US than in any of the other major advanced economies that we track. (See here.) And the encouraging pace of the vaccine rollout should allow restrictions to be eased a fair bit further in the coming months. Perhaps unsurprisingly, measures of mobility tend to have a strong relationship with gasoline consumption (see Chart 1), which makes up around 45% of total US oil demand. Putting all this together, we now expect slightly higher gasoline and crude oil consumption in the US.
  • What’s more, the outlook for oil demand appears relatively positive elsewhere. Although a resurgence in cases in India has led us to nudge down our forecast for EM Asia, the bigger picture is that industrial activity is holding up well in most other parts of the world (see here) and will support a revival in oil demand.
  • The upshot is that the brighter outlook for oil demand elsewhere should more than offset the downward revision we are making to our oil demand forecasts for Europe and EM Asia. In fact, the net effect of our revisions is that we now expect global oil demand to be marginally stronger than we previously thought. (See Chart 2, which shows the changes to our consumption growth forecasts by region.)
  • Admittedly, this slight improvement to the outlook for global oil demand is overshadowed by the recent decision by OPEC+ to increase its oil production quotas from May and the prospect of higher Iranian production. And as a result, we have nudged down our Q2 and Q3 2021 forecasts for Brent to $70 and $75 per barrel respectively. (See here.) But a strong rebound in global demand should still help keep the oil market in a (albeit smaller) deficit, pushing prices up a little further in the near term.

Chart 1: US Gasoline Consumption &
CE COVID Mobility Tracker

Chart 2: CE Forecasts for Changes in Oil Consumption
by Region (Mn. BpD)

Sources: EIA, Refinitiv, Capital Economics

Sources: IEA, Capital Economics


Adam Hoyes, Assistant Economist, adam.hoyes@capitaleconomics.com