The outlook for oil “remains fragile” as the pandemic depresses demand, and Opec’s plans to increase supply next year will leave global markets precariously balanced, the International Energy Agency said.
“There is a risk that the demand recovery is stalled by the recent increase in Covid-19 cases in many countries,” the IEA said in its monthly market report.
At the same time, markets are set to receive fresh supplies in January as Opec and its partners relax some of the measures they’ve taken to prevent a glut. Once the taps are opened, “there is only limited headroom for the market to absorb” anything more, the Paris-based agency said.
The acceleration in virus infections is leading many in the market to question if the Organization of Petroleum Exporting Countries and its allies will increase supply from January. Producers inside the group are also having doubts, according to delegates.
Global oil demand remains on track for an unprecedented 8% slump this year because of the economic fallout from the virus. To offset the drop, and prop up prices, the Opec+ alliance led by Russia and Saudi Arabia has made vast reductions in output.
Their measures have “shown some success,” depleting the world’s swollen inventories in the third quarter at a rate of 900,000 barrels a day, the IEA said. Crude futures are hovering just above $40 a barrel in London.
Yet the declines in inventories will slow markedly in the first half of next year, the report showed.
Having phased out some of the biggest supply cutbacks in August, Opec+ is due to ease them further. The 23-nation group will add about 1.9mn barrels a day in January, under the terms of an agreement set up earlier this year, in anticipation of stronger demand.
When those additional barrels arrive, stockpile drawdowns will decelerate. Weakening prices in the physical crude market, where real cargoes are bought and sold, suggest that the balance could easily be tipped if demand slows further or other producers raise output, the IEA said.
“The uncertain outlook that could see the drawdown of stocks falter is reflected in the fact that physical prices have weakened,” it said.
There has been a surprise return of output from Opec nation Libya, after a military commander allowed exports to resume. The IEA expects output from the nation – which is exempt from production quotas – to soar to 700,000 barrels a day in December from 140,000 last month.