Oil demand has continued to surge as more people are being vaccinated against the COVID-19 pandemic and this has opened up more economic activity around the world. With these positives, the International Energy Agency (IEA) has reported that OPEC+ nations have tightened production i.e they are pumping less than needed, and prices are set to be volatile until it reaches a deal to raise output. The IEA on Tuesday stated that oil prices would be volatile until differences were resolved among members of OPEC+, which groups the Organization of the Petroleum Exporting Countries, Russia, and other oil producers.
"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," an 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. But demand is rebounding, with IEA estimating it 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.
The IEA 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 main international oil contracts have been trading around $75 per barrel, and some analysts see a spike to $100 as possible.
The rise in the number of COVID-19 cases in some countries has kept so many investors in doubt as this has remained a key economic downside risk, the Paris-based agency reported that although oil storage levels in most developed countries had fallen below historical averages and the current economic recovery meant this autumn was set to see the biggest draw on stocks in at least a decade. It said refineries were working hard to meet demand pent up by lockdown restrictions as "drivers frustrated by confinement and travel restrictions take to the road en masse".
Investors have been worried that a surge in inflation could force central banks to raise their ultra-low interest rates, thus removing one of the main supports for the economic recovery. It also noted that a spike in prices would not be in the long-term interest of oil producers.
“While prices at these levels could increase the pace of electrification of the transport sector and help accelerate energy transitions, they could also put a drag on the economic recovery, particularly in emerging and developing countries,” the IEA report said.
While the agency, which advises oil-consuming nations, foresees oil demand recovering along with the global economy, it doesn’t discount the pandemic continuing to weigh upon the market. “Covid-19 remains a significant threat to oil demand growth in the near- to medium-term, in particular in the non-OECD.”
Emerging nations not in the OECD group of advanced nations — such as China and India — were responsible for much of the growth in the global economy before the pandemic.