Oil prices dip after IEA warns of 'uncertain future'

Suban Abdulla
·3 min read
Brent crude is up 80% since the end of October last year, driven by optimism over the vaccine rollouts and production cuts. Photo: Getty
Brent crude is up 80% since the end of October last year, driven by optimism over the vaccine rollouts and production cuts. Photo: Getty

Oil prices retreated on Wednesday after the International Energy Agency (IEA) said that prices are unlikely to mount a dramatic and sustained rise despite COVID-19 vaccines, which are expected to boost demand later this year.

IEA's boosted oil barrels to 100,000-barrels-a-day (bd) in its monthly report. This is the amount by which it expects global oil demand to rebound in this year, which is 5.5 million bd.

The Paris-based body expects American crude production to fall by 180,000 barrels a day. It expects demand to be only be 1.4 million barrels a day short of pre-pandemic levels, in the final quarter of 2021.

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"Oil's sharp rally to near $70 [£50] a barrel has spurred talk of a new supercycle and a looming supply shortfall. Our data and analysis suggest otherwise," it said.

It attributed the increase to a melange of factors, including economic rebound due to the vaccine rollout in Q3 and four as well as cold winter weather in the first quarter of this year.

However, IEA said "oil inventories still look ample compared with historical levels" even as the stock overhang from 2020 — as the pandemic crushed demand for crude — begins to dissipate.

The international oil benchmark, Brent crude is up 80% since the end of October last year, this is driven by optimism over the vaccine rollouts and production cuts by some of the world's largest exporters, such as Russia.

Both Brent (BZ=F) declined and West Texas Crude — the US benchmark (CL=F) were down 1%, but benchmarks are still up more than 30% so far this year.

Chart: Yahoo Finance
Chart: Yahoo Finance

Experts have said that the report triggered some sell-off on the back of its release.

Naeem Aslam, chief analyst at Avatrade said: "IEA’s report has triggered an action among oil traders. We have seen some selling on the back of this report as traders believe that oil price this high is going to destabilise the supply. We have a clear evidence of US oil rigs coming back online at a much faster pace as US oil producers try to recoup some of their losses from last year."

Aslam added that oil prices "have hit their resistance level" and that "it is unlikely to see any substantial run in oil prices."

Meanwhile, those expecting a return to $100 (£72) bd, last hit in 2014, have said that fiscal stimulus measures will cause an uptick in demand, as spending on production falls, which could fuel a longer-lasting price surge.

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It comes as the Organisation of Petroleum Exporting Countries and its allies (OPEC+) agreed measures last week to mostly maintain their supply cuts for April, galvanising the market and causing investors to predict a super-cycle — a large multi-year price rise.

An increase of 500,000 barrels a day was widely expected, however, Saudi Arabia agreed to maintain a voluntary 1 million barrels per day cut despite calls from some smaller producers to allow a modest loosening. Russia was allowed a 130,000 barrel a day increase in quota and Kazakhstan 20,000.

The group is awaiting a more solid recovery in demand from COVID-19 despite a recent rally in oil prices in the past two months.

Earlier in March, Goldman Sachs (GS) raised its forecast for Brent crude by $5 to $75 per barrel in the second quarter and $80 in the third quarter.

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