IEA warns of economic recovery drag without higher Opec+ oil output

Oil markets will tighten “significantly” in the coming months unless the Opec+ group can reach a deal to raise production, the International Energy Agency said on Tuesday, warning that rising oil prices could “put a drag on the economic recovery, particularly in emerging and developing countries”.

The IEA said global oil demand “surged” by an estimated 3.2m barrels a day in June to 96.8m b/d, or about 3 per cent below pre-pandemic levels.

Opec+ last week failed to reach a deal over adding more oil production after key member the United Arab Emirates rejected an agreement that did not revise how its production target was calculated, leaving the group sticking with its existing supply curbs.

That helped drive oil prices to the highest level since 2018 last week, above $75 a barrel, though they have since pulled back slightly.

“The Opec+ stalemate means that until a compromise can be reached, production quotas will remain at July’s levels,” said the IEA, which is primarily funded by the OECD club of wealthy nations, in its closely watched monthly report.

“In that case, oil markets will tighten significantly as demand rebounds from last year’s Covid-induced plunge. The overhang in global oil stocks that built up last year has already been worked off, with OECD industry stocks now well below historical averages.”

Opec+ last year slashed oil production by almost 10 per cent of pre-pandemic global demand as lockdowns and travel bans hammered consumption of fuels. While the group, including Saudi Arabia and Russia, has slowly been restoring production, about 6m b/d are still being held back from the market.

The IEA said that after global demand fell last year from about 100m b/d to 91.1m b/d it was expected to grow by 5.3m b/d in 2021, getting back to 96.4m b/d. By 2022 it is expected to average 99.5m b/d, with consumption almost fully restored to the level it was before the pandemic.

Demand is expected to grow particularly fast in the third quarter of this year as vaccination programmes in developed countries lead to a rapid reopening of the economy and greater mobility, boosting fuel demand.

The IEA said consumption would jump by 3.3m b/d quarter on quarter during July-September, a level it said was two to three times as large as the normal quarterly seasonal increase for that time of year.

The “call” on Opec+ crude — the amount of oil needed from the group to balance the market — is expected to reach 42.8m b/d in the third quarter and 44.1m b/d in the fourth quarter, the IEA said.

In June Opec+ produced 40.9m b/d.

“Oil markets are likely to remain volatile until there is clarity on Opec+ production policy,” the IEA said. “And volatility does not help ensure orderly and secure energy transitions — nor is it in the interest of either producers or consumers.”