IEA: High oil prices may slow economic recovery

While the current high prices 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, Report informs, citing the July 2021 Oil Market Report of the International Energy Agency (IEA).

Analysts remind that OPEC + countries have not yet been able to agree on an increase in production from August due to the position of the UAE.

As a result, Brent is around $75/bbl due to a possible increase in the supply deficit if no agreement is reached on production growth.

“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 report reads.

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. 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.

“Crude oil balances are expected to be especially tight. 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,” the IEA said.

“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. In June, US retail gasoline prices rose above $3/gal for the first time in nearly seven years. Pump prices have also risen sharply in Europe. In India, gasoline and diesel prices are at their highest level ever, adding to inflationary pressures amid a broader commodities rally. Fuel prices are rising in Brazil, too, amid its steepest consumer price inflation rate in nearly five years,” the agency added.

“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,” the agency concluded.

In April, OPEC countries, as well as Russia and several other non-cartel countries (OPEC +), agreed to gradually increase oil production by 1.15 million barrels per day. According to the decision, 23 countries participating in the deal will increase output by 350,000 barrels in May and June and another 450,000 in July.