Oil Prices Continue to Rise in the Third Quarter

[Asia Economy Reporter Song Hwajeong] Although the recent rise in oil prices has slowed, oil prices are expected to continue rising in the third quarter.

On the 15th (local time) at the New York Mercantile Exchange, the price of August West Texas Intermediate (WTI) crude oil fell 2% from the previous session to $71.65 per barrel. It has dropped 3.9% since the beginning of this week. This is the first time in about a month that oil prices have fallen to the $71 level.

Factors such as the possibility of increased production by OPEC+ (the Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC allies) oil-producing countries and the spread of the COVID-19 Delta variant contributed to the decline in oil prices. With Saudi Arabia and the United Arab Emirates (UAE) agreeing on production baselines, concerns about supply expansion grew amid expectations that OPEC+ will soon agree to ease production cuts.

Although showing weakness recently, oil prices are expected to continue rising in the third quarter. Shim Subin, a researcher at Kiwoom Securities, said, "This week, oil prices weakened as Saudi Arabia and the UAE announced an agreement to raise the UAE's production baseline, strengthening expectations of increased crude oil supply," adding, "However, this will not change the current tight supply and demand conditions."

First, even if OPEC+ agrees to raise the UAE's production baseline, the adjusted baseline will be applied after April 2022. Also, since the production cut reduction discussed at the last meeting was 400,000 barrels per day on average each month, if OPEC+ agrees to the content agreed upon by the UAE and Saudi Arabia and reaches a consensus based on previously discussed terms, there will be no significant change in OPEC+'s moderate production increase policy in the second half of the year. Researcher Shim explained, "Considering this, it seems difficult for significant changes to occur in the tight supply and demand conditions within this year," and added, "Especially in the third quarter, when travel distances increase in regions such as the United States and Europe, oil prices are expected to continue rising."

Next year, crude oil demand is expected to recover to pre-COVID-19 levels. According to Kiwoom Securities, the U.S. Energy Information Administration (EIA), OPEC, and the International Energy Agency (IEA) all maintained their existing outlooks in their July energy outlook reports, mentioning expectations for demand recovery in the second half of the year, and there was little change in the 2021 demand growth forecasts. Although they noted that the spread of the Delta variant has increased uncertainty about demand recovery, there was no significant change in demand forecasts, and they projected continued growth in crude oil demand due to economic growth, increased vaccination rates, and easing of social distancing measures. In particular, the EIA and OPEC predicted that with strengthened COVID-19 containment measures, crude oil demand recovery will continue, and in 2022, demand will exceed pre-COVID-19 levels. There were no major changes on the supply side either. OPEC slightly raised its forecast for the U.S. daily production increase this year but noted ongoing uncertainties regarding the financial and operational aspects of U.S. crude oil production. The EIA also did not make significant changes to its forecast for a gradual recovery in U.S. production. Researcher Shim analyzed, "Since there are no major changes in the outlook for demand and supply recovery paths, major energy agencies expect inventory reductions in the crude oil market to continue within this year."