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Oil market set for deficit and volatility: IEA

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on July 13, 2021
Reuters file photo

The main international oil contracts have been trading around $75 per barrel, and some analysts see a spike to $100 as possible.


Oil markets are likely to remain volatile until there is clarity on Opec+ production policy, the International Energy Agency said on Tuesday and warned of a deepening supply deficit if a deal cannot be reached.

The main international oil contracts have been trading around $75 per barrel, and some analysts see a spike to $100 as possible.

Rystad Energy’s oil markets analyst Louise Dickson said oil prices are on the rise as a result of the anticipation of data confirming a bullish trend of crude inventory draws in the US.

“News of yet another oil stocks draw will likely have a larger effect on the WTI benchmark, but also a residual upswing to support other benchmarks such as Brent.”

Dickson said the market is aware, however, that the blockbuster rebound in oil products demand in the US is not a trend being repeated around the rest of the world, where many countries are still very much in the trenches of getting the Covid-19 virus under control.

“There is another possibility: the overall Opec+ deal breaks down and producers open the taps and try to gain market shares, which would likely lead to prices crashing,” the IEA said.

“At the same time, 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,” said the IEA.

The IEA said that without increased production by Opec+ nations, the market for crude is set to tighten, with additional stocks built up during the pandemic already gone and reserves running below the long-term average in industrialised nations.

The Paris-based body forecasts the biggest draw upon stocks in at least a decade will happen this quarter as Opec+ pumps nearly 2.0 mbd less than market demand. The gap will rise to 3.2 mbd in the final three months of the year.

It also noted that a spike in prices would not be in the long-term interest of oil producers. IEA report said.

A meeting of Opec+ nations earlier this month was deadlocked over plans to gradually ease production cuts, imposed to reverse the plunge in oil prices at the start of the coronavirus pandemic as demand tumbled.

The IEA estimates that demand surged by an estimated 3.2 million barrels per day (mbd) last month, which is more than a third of the overall drop in demand last year. It expects oil demand to rise by another 3.3 mbd in the three months from July. That is more than twice as large as the seasonal increase registered during the same period in 2019, which the IEA said is a result of easing Covid restrictions and increasing vaccination.

While Opec+ had been set to gradually raise oil output, the stalemate means production is frozen at current levels until an agreement is found.

The Paris-based agency’s concern over scarce oil supply comes less than two months after it issued a landmark report warning that investors should not fund new oil, gas, or coal projects if the world wants to reach net-zero emissions by mid-century.

“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,” the IEA said.

“The Opec+ stalemate means that until a compromise can be reached, production quotas will remain at July’s levels. In that case, oil markets will tighten significantly as demand rebounds from last year’s Covid-induced plunge,” it added in its monthly oil market report.

—issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.





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