Panic as IEA projects oil market tightness, volatility
According to the IEA, 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 IEA acknowledges that if OPEC+ cannot reach an 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 Group Managing Director of Nigerian National Petroleum Corporation (NNPC) Mele Kyari, had said that oil prices were “very high” and had started to constrain both producers and consumers.
With local subsidy challenges, the country’s earnings are being eroded on the expensive importation of refined fuel.
“Producers are aware that when your prices are too high, you lose your customers. You have to bring it to a level that your customers can afford,” Kyari said during a television interview.
Oil prices have risen more than 50 per cent in 2021, amid a recovery in demand buoyed by vaccine rollouts and OPEC+ supply discipline.
“The only way to pull down prices is to increase supply. So, that is what is going to happen. OPEC is going to intervene to see how we can bring down prices,” Kyari said.
Kyari added that the rise in oil prices was hurting Nigeria, which relies heavily on fuel imports for its needs. Nigeria has four refineries with a combined nameplate capacity of 445,000 b/d, which are all offline after years of neglect, making the country fully reliant on refined product imports.
Indeed, OPEC’s 13 members pumped 26.19 million barrels per day in June, up 480,000 bpd from May, mostly due to Saudi Arabia’s continued unwinding of its voluntary extra production cut.
Despite the production gains, higher quotas for the month meant OPEC+ compliance was at 110.16% compared to 111.45% in May, S&P Global Platts survey found.
The coalition has now added 970,000 b/d in the past two months, as part of its plans to relax its output quotas to meet the growing demand for its oil.
But a bitter feud between emerging rivals Saudi Arabia and the UAE could put an end to that, with a deal to raise output by 2 million b/d between August to December in jeopardy. The dispute, which a week of negotiations has so far failed to resolve, could cause the OPEC+ alliance to leave quotas flat after July, potentially squeezing an already tightening market through the rest of the summer.
But it could also lead to sliding compliance, if not an outright price war if the dispute escalates, some analysts say.
Ministerial talks are currently suspended, with the UAE not budging from its stance that its output target should be revised as a condition of continuing the OPEC+ supply management pact to the end of 2022 and Saudi Arabia insisting that the production rises and the extension remain tied together, according to delegates.
The IEA 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.
Furthermore, “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 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 the 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.
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