“The immediate boost from OPEC+ is colliding with slower demand growth and higher output from outside the alliance, stamping out lingering suggestions of a near-term supply crunch or super cycle,” the IEA said in its monthly report.
Oil prices have retreated 6% this month as the contagious delta variant triggers renewed lockdowns in China and other key Asian consumers where vaccination rates are lagging. Brent futures are trading near $71 a barrel, having hit a two-year high near $78 in early July.
The “recent rally has lost steam on concerns that a surge in Covid-19 cases from the Delta variant could derail the recovery just as more barrels hit the market,” the IEA said.
The 23-nation OPEC+ coalition led by Saudi Arabia and Russia agreed last month on a roadmap for restoring the rest of the oil supplies it shuttered when the pandemic emerged. The additional barrels are, however, starting to flow at an inauspicious moment.
Global oil demand “abruptly reversed course” last month, falling slightly after surging by 3.8 million barrels a day in June, the IEA said. The agency lowered estimates for consumption in the second half of the year by 550,000 barrels a day.
Still, the IEA projects that world fuel use will continue to increase as the global economic recovery gathers pace, reaching an average of 98.9 million barrels a day in the last three months of this year.
The recovery achieved so far is already having unwanted side-effects.
As U.S. motorists grapple with $3-a-gallon gasoline and fears over inflation, the Biden administration is insisting that OPEC+ accelerate its supply increases. “At a critical moment in the global recovery,” OPEC’s plans are “simply not enough,” National Security Advisor Jake Sullivan said in a statement on Wednesday.
The Organization of Petroleum Exporting Countries appeared to push back a little against the U.S. request in its own monthly report, also published on Thursday, which said that the “precarious outlook” still requires “determined efforts” from its members and allied producers.
The IEA and OPEC both significantly bolstered forecasts for supplies outside of the cartel in 2022 as the U.S. and other producers recover from the pandemic slump in investment. Both institutions boosted projections for non-OPEC output by 1.1 million barrels a day for next year.
As a result, OPEC is already producing the volume of crude needed in 2022, the IEA report showed. With output at 26.7 million barrels a day in July, proceeding with plans to restore more production will likely tip the market back into oversupply.
“The scale could tilt back to surplus in 2022 if OPEC+ continues to undo its cuts and producers not taking part in the deal ramp up in response to higher prices,” the agency said.