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The oil market will see tighter supply for now amid a dispute inside OPEC+ about how to ease production curbs but it still faces the risk of a dash for market share if disagreement persists, the International Energy Agency (IEA) said on Tuesday.

The Paris-based agency said oil prices would be volatile until differences were resolved among members of OPEC+, which groups the Organization of the Petroleum Exporting Countries, Russia, and other oil producers.

"The OPEC+ stalemate means that until a compromise can be reached, production quotas will remain at July's levels. In that case, oil markets will tighten significantly as demand rebounds from last year's COVID-induced plunge," an IEA report said.

OPEC+ has been slowly unwinding record output curbs agreed on last year to cope with the pandemic. But a dispute over policy between Saudi Arabia and the United Arab Emirates this month meant plans to pump more oil by the end of 2021 were put on hold.

If differences persist, analysts say the group could even abandon their pact, prompting them to open the taps in a race for market share, adding uncertainty to a market that has seen prices surge to 2-1/2 year highs and slide back again.

"The possibility of a market share battle, even if remote, is hanging over markets, as is the potential for high fuel prices to stoke inflation and damage a fragile economic recovery," the IEA said in its monthly report.

"Oil markets are likely to remain volatile until there is clarity on OPEC+ production policy. And volatility does not help ensure orderly and secure energy transitions – nor is it in the interest of either producers or consumers," the IEA said.

The IEA said in a report in May that investors should not fund new oil, gas, or coal projects if the world wanted to reach net-zero emissions by mid-century. read more

Rising coronavirus cases in some countries remained a key economic downside risk, the IEA said, although oil storage levels in most developed countries had fallen below historical averages and the current economic recovery meant this autumn was set to see the biggest draw on stocks in at least a decade.

It said refineries were working hard to meet demand pent up by lockdown restrictions as "drivers frustrated by confinement and travel restrictions take to the road en masse". (Reuters)