IEA sees oil market tightness on Opec+ dispute

Oil markets will tighten "significantly" if the Opec+ stalemate continues, the IEA said today.

The Paris-based energy watchdog assumes that until the group reaches a compromise in its negotiations to boost supply, July crude production quotas will be rolled over. "In that case, oil markets will tighten significantly as demand rebounds from last year's Covid-induced plunge," the IEA said in its latest monthly Oil Market Report (OMR).

The agency points out that the overhang in global oil stocks that built up last year has already been worked off and that OECD industry stocks are now well below historical averages. Futhermore, "our current balances suggest the third quarter of 2021 could see the largest crude oil stock draw in at least a decade", it said. "Product stocks are also set to fall as drivers frustrated by confinement and travel restrictions take to the road en masse."

The IEA acknowledges that that if Opec+ cannot reach agreement, a battle for market share could ensue among its members. "The possibility of a market share battle, even if remote, is hanging over markets, as is the potential for high fuel prices to stoke inflation and damage a fragile economic recovery," it said, adding that uncertainty over the impact of the Covid-19 Delta variant "is also tempering sentiment". Until there is clarity on Opec+ production policy, oil markets are likely to remain volatile, it said.

The IEA estimates that global oil consumption jumped by 3.2mn b/d last month compared with May, following two consecutive months of falls. It expects robust global economic growth, rising vaccination rates and an easing of Covid restrictions "to underpin stronger global oil demand for the remainder of the year".

The IEA forecasts that demand in July-December will be 4.6mn b/d higher than in the first six months of the year. It has raised its full-year 2021 demand growth projection by 40,000 b/d from last month's report to 5.4mn b/d on the back of a "stronger than expected rebound in oil demand in countries such as China, Kuwait and the US". And it has trimmed its 2022 demand growth forecast by 60,000 b/d to 3mn b/d, with higher prices forcing downgrades in the US and some parts of Europe. It warns that "escalating Covid cases in a number of countries remain a key downside risk to the forecast".

The IEA sees the call on Opec+ crude rising to 42.8mn b/d in the third quarter and 44.1mn b/d in the last three months of 2021, compared with estimated June output of 40.9mn b/d. It expects supply from outside Opec+ to increase by 770,000 b/d this year and a further 1.6mn b/d in 2022.

By Konstantin Rozhnov