The oil market will see tighter supply for now as a dispute inside OPEC+ between Saudi Arabia and the UAE goes unresolved, according to a new report from the International Energy Agency (IEA).
World oil markets are on edge with OPEC+ negotiations to boost supply now in deadlock, and after initially surging to multi-year highs in early July, benchmark crude oil prices have since eased.
“Oil prices reacted sharply to the OPEC+ impasse last week, eyeing the prospect of a deepening supply deficit if a deal cannot be reached. 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. The uncertainty over the potential global impact of the Covid-19 Delta variant in the coming months is also tempering sentiment,” the IEA writes.
“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.”
According to Reuters, OPEC+ is yet to make progress closing divisions between Saudi Arabia and the United Arab Emirates that last week prevented a deal to raise oil output. Another policy meeting this week is less likely as a result, OPEC+ sources told Reuters.
The disagreement on output cuts reflects differing priorities with the member-states, particularly the UAE, Russia, and Saudi Arabia. Russia has been pushing for significant production increases “as it sees current oil prices as too high and believes that may encourage higher shale output from the U.S., which risks a price collapse similar to 2016,” according to the Wall Street Journal. The UAE, similarly, wants to ramp up production faster than Saudi Arabia is seeking to drive investments into other sectors.
As a result of the disagreement, if it persists, “crude oil balances are expected to be especially tight,” the IEA said. “Refiners are ramping up quickly to meet higher demand. Our current balances suggest 3Q21 could see the largest crude oil stock draw in at least a decade. Product stocks are also set to fall as drivers frustrated by confinement and travel restrictions take to the road en masse. Mobility data show US travel in recent weeks far exceeding pre-Covid levels. Our forecast for global oil demand is largely unchanged since last month’s Report, rising 5.4 mb/d this year and a further 3 mb/d in 2022.”
The report also said that prices at these levels “could increase the pace of electrification of the transport sector and help accelerate energy transitions,” but the they could “also put a drag on the economic recovery, particularly in emerging and developing countries.”
