The recent failure of OPEC and its allies to agree on a plan to ease production cuts in August means oil-market investors face the contradictory worries of both undersupply and oversupply, the International Energy Agency said Tuesday.
The Paris-based organization said that if the Organization of the Petroleum Exporting Countries and its allies cannot reach a supply agreement, the crude market faces “the prospect of a deepening supply deficit.” With the global oil market having now used up the supply glut it accrued at the start of the pandemic, potential inflationary pressures could damage the fragile global economic recovery, the IEA said.
At the same time, the memory of last year’s oil price war — which contributed to the collapse of the crude market — remains fresh for investors, and “the possibility of a market share battle, even if remote, is hanging over markets,” the IEA’s report added.
The price of oil has remained volatile in the days since OPEC was last week unable to break a deadlock over oil production, with differences between Saudi Arabia and the United Arab Emirates — normally staunch allies — the main hurdle to an agreement.
Crude prices edged higher early Tuesday, with Brent crude oil, the global benchmark, up 0.4% at $75.49 a barrel. West Texas Intermediate futures, a key U.S. gauge, rose 0.4% to $74.41 a barrel. Both benchmarks closed Friday with their first weekly losses since May as uncertainty over an OPEC+ deal and worries about the spread of the coronavirus Delta variant weighed on prices.
In addition to the supply uncertainty brought by the OPEC+ group’s impasse, the potential impact of rising coronavirus cases on the long-planned easing of pandemic restrictions in several wealthy countries weakens demand visibility as well, the IEA said.
The watchdog made only minor adjustments to its headline forecasts, leaving unchanged its global oil-demand forecast for 2021 and trimming its growth estimates for next year by 100,000 barrels a day to 3 million barrels a day.
Meanwhile, the agency increased its forecast for non-OPEC supply growth this year by 60,000 barrels to 770,000 barrels a day and maintained its forecast growth of 1.6 million barrels a day for next year. The IEA said that it expects around a million barrels of that 2022 growth to come from the U.S., where producers have focused more on promises to return cash to investors than increasing production.
“At current prices, operators could honour those pledges while at the same time increasing activity,” the IEA added.
Even with that additional supply, though, the IEA said its forecast increase in oil market supply is “not fast enough to meet stronger demand growth” with inventories now below their five-year average.
OPEC was keeping the oil market tight even before last week’s breakdown in negotiations and pumped 1.4 million barrels a day less than demand in June. That figure is expected to grow by a further 1.1 million barrels next year, the report said.
That supply deficit is providing welcome relief for refiners — a part of the oil market that has been particularly hard hit by the pandemic.
While the IEA doesn’t expect global oil demand to hit pre-pandemic levels until late 2022, the organization estimates that 2021’s third quarter might see the largest crude oil stock draw in at least a decade, while U.S. travel data — which suggest that activity has already surpassed pre-pandemic levels — are likely to prompt a drop in refined-product stocks as well.