The oil market has been experiencing significant market volatility for about a week now, as market participants are anticipating the possibility of a new price war within the OPEC+ alliance. On Tuesday, the International Energy Agency (IEA) made assumptions about this very outcome, adding that the current impasse is threatening to derail the global economic recovery.
What you should know
- The IEA oil market report revealed that in June, global oil demand is estimated to have jumped by as much as 3.2 million barrels per day (bpd) to 96.8 million bpd.
- The IEA stated that for the rest of the year, oil demand will continue to rebound thanks to solid economic growth, rising vaccination rates, and easing restrictions in many economies.
- The agency also noted that the oil market is on edge because of the ongoing OPEC+ deadlock, as volatility in the market is very high which does not help either producers or consumers.
- The IEA’s monthly report stated, “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”.
What to expect
The OPEC+ has been at an impasse for over a week. The inability of the group to reach a compromise would mean that OPEC+ will leave production quotas in August flat compared to July’s levels. This scenario will surely tighten the market much more as global oil demand continues to rebound. The IEA report stated that the excess oil inventories in developed economies are already below historical averages and without OPEC+ easing its production cuts, we could see a significantly tighter market with especially tight crude oil balances.
The IEA added that oil prices at current or higher levels could incentivize electrification but high prices could also slow down the economic recovery, especially in large emerging markets.
Prices at the pump jumped to a seven-year high in the United States. They are also rising across Europe and reached all-time highs in India, the world’s third-largest crude oil importer. This scenario is likely to play out in Nigeria as the NNPC has stated it cannot continue to bear the subsidy burden as the landing cost of fuel is rising, currently at N232, according to the NNPC General Managing Director, Mele Kyari.
The IEA concluded its report stating, “Oil markets are likely to remain volatile until there is clarity on OPEC+ production policy. And volatility does not help ensure orderly and secure energy transitions – nor is it in the interest of either producers or consumers”.
As the market is heading towards the Asian session, Brent crude oil is up 1.74%, trading $76.48 a barrel after losing 0.5% on Monday while U.S. Oil, West Texas Intermediate crude is trading $75.31 a barrel, up 1.63% after falling 0.6% in the previous day. The effects of a bullish dollar caused by an increased U.S inflation rate to 5.4% announced today is not stopping oil from trading near record highs.
