Trouble is brewing for the oil market. That was the message from the IEA’s latest monthly report, released yesterday. A double whammy of headwinds in the shape of surging Delta infections and the OPEC+ impasse is making for a tense backdrop. The World Health Organisation recently warned that the Delta Covid-19 variant, which spreading fast at the time of writing, was becoming dominant and many countries. What’s more, it is so contagious that by some estimates more than 80% of a population would need to be fully jabbed in order to contain it — a challenging target even for nations with significant vaccination programmes. Small wonder, then, why the latest Covid wave has forced renewed lockdowns in countries with high vaccination rates, let alone those with limited access to vaccines.

Fears are mounting that rising Covid-19 Delta cases could delay a full economic recovery. This, in turn, poses a significant threat to oil demand growth in the near- to medium-term. For now, though, pent up demand, robust global economic growth, rising vaccination rates and easing social distancing measures should support more travelling during the next few months, according to the IEA. In other words, these will combine to underpin stronger global oil demand for the remainder of the year. The IEA expects global oil demand to rise in the coming months with 2H21 on course to increase 4.6 mbpd versus 1H21 levels to 98.7 mbpd, largely unchanged from last month’s report.

The uncertainty over the potential impact of the Covid-19 variant is lingering over the oil market. Yet of greater concern is the OPEC+ stalemate. The current deadlock in talks is casting a major shadow over the near-term supply outlook. Until a compromise can be reached to ease supply curbs beyond this month, the remaining OPEC+ cut of 5.8 mbpd is expected to be maintained. Oil markets are therefore on track to tighten significantly over the coming months as demand rebounds. This comes as the overhang in global oil stocks that built up last year has already been worked off. The IEA revealed that OECD industry stocks are now well below historical averages. OECD total industry stocks rose by 18.1 million bbls in May but are below the 2016-2020 average and the pre-Covid 2015-19 average.

As for non-OPEC, strong gains are expected in 3Q21 as heavy maintenance is concluded and new projects come online. Supply from producers outside of OPEC is forecast to increase by 1.3 mbpd in 3Q21 from the previous quarter to average 65 mbpd and to hold steady in 4Q21. However, despite these gains, they will come nowhere close to filling the gap that potential OPEC+ inaction would create. As a result, the ongoing OPEC+ impasse risks overtightening the market and forcing prices to overshoot. Needless to say, this would act as a drag on the economic recovery.

As things stand, market players are bracing for a potential Delta-triggered demand shock while also awaiting the outcome to the current OPEC+ standoff over future oil supply increases. Both sides of the oil equation are battling uncertainties. And with the oil market in a state of suspense, the odds are that prices are likely to remain volatile over the summer months.

Choppy times

Volatility was a prominent theme in yesterday’s trading as Brent and WTI fell into the red before recovering to end the session more than $1/bbl higher. An initial bout of weakness came courtesy of demand alarm bells from the world’s biggest crude importer. Official data showed China’s June crude oil imports fell to 9.77 mbpd, down 2% from the prior a month and the lowest level in 2021. For the first half of the year, China’s crude oil imports fell 3% from a year earlier, the first contraction for the first six months of a year since 2013. Buying pressures, however, returned to the fore later in the session after the IEA warned over crude shortages and the prospect of tighter markets in the near-term.

Elsewhere, volatility was also on full display on Wall Street. After making a subdued start, leading US stock indexes hit another record high before finishing marginally lower. The feel-good factor was dashed by US data showing price pressures are still elevated. US inflation accelerated to a new 13-year high of 5.4% in June, higher than economists expected for the fourth consecutive month and raised the prospect of the Fed hiking interest rates sooner.

Returning to the oil front, prices are expected to take their cues from a looming EIA update concerning oil stocks. Overnight, the API reported that US crude stocks continued to trend lower last week with a 4.1 million bbls decline. Gasoline inventories followed suit with a drop of 1.5 million bbls. Meanwhile, distillates were once again the outlier as stocks in this fuel jumped by 3.7 million bbls.