Stronger than expected oil demand growth, unexpected supply outages and modest growth from OPEC members mean the oil market is on course to balance in second-half 2016, according to the International Energy Agency (IEA).
That is, assuming there are no surprises, the IEA said in its monthly oil report released June 14.
“At halfway in 2016 the oil market looks to be balancing; but we must not forget that there are large volumes of shut-in production, mainly in Nigeria and Libya, that could return to the market, and the strong start for oil demand growth seen this year might not be maintained,” the IEA said. “In any event, following three consecutive years of stock build at an average rate close to 1 million bbl/d there is an enormous inventory overhang to clear. This is likely to dampen prospects of a significant increase in oil prices.”
The monthly oil market report was released as oil companies continued to feel the pain of lower commodity prices, the outcome of a supply-demand imbalance brought on by an abundance of oil and reluctance by some of the world’s biggest producers to cut production. Global output fell by 590,000 bbl/d year-on-year to 95.4 MMbbl/d.
Output in the U.S., where a technology-driven shale revolution has made it possible to unlock more economic barrels of oil from the ground, has fallen as companies produce less and leave wells uncompleted until prices rebound further. Plus, outages caused by events such as raging wildfires in Canada have contributed to the global oil supply falling by nearly 800,000 bbl/d in May, according to the IEA.
The IEA estimates production from non-OPEC countries will fall by 900,000 bbl/d in 2016. U.S. shale output is also expected to tumble by 500,000 bbl/d. However, the IEA expects non-OPEC supply growth will return in 2017, rising by a “modest” 200,000 bbl/d.
Supply disruptions have not been limited to non-OPEC countries.
The IEA pointed out that OPEC crude output saw its first significant production since early 2013—dropping by 110,000 bbl/d in May to 32.61 MMbbl/d. Contributing to the fall were losses in Nigeria, where militants have attacked oil facilities and pipelines in the Niger Delta to draw attention to their demand for more oil wealth in certain parts of the region.
Militant action has forced production to 30-year lows in Nigeria, the IEA said, later adding troubles in Nigeria and Libya—where production “remains a long way from significantly increasing”—appear to be longstanding.
“This current list of shut-ins might soon be augmented by Venezuela where the deteriorating situation could affect the operations of the oil industry,” the IEA said. “In addition to the unplanned shut-ins, our forecast of production falls due to lower oil prices remains intact.”
But Iran has emerged as OPEC’s fastest source of supply growth in 2016. The country, which was freed in January from economy-crippling sanctions related to development of nuclear capabilities, is expected to add 700,000 bbl/d.
“On the planning assumption that OPEC oil production grows modestly in 2017 we expect to see global oil stocks build slightly in 1H17 before falling slightly more in 2H17,” the IEA said. “For the year as a whole there will be a very small stock draw of 0.1 million bbl/d. We must stress that this is our first look at 2017 and the huge number of moving parts will see us amend our numbers accordingly. However, to return to a phrase from last month’s report, the direction of travel seems to be clear.”
Meanwhile, global demand is picking up.
Calling oil demand growth “significantly stronger” than expected, the IEA revised up global oil demand growth for 2016 to 1.3 MMbbl/d.
“In 2017 we will see the same rate of growth and global demand will reach 97.4 MMbbl/d,” the IEA said. “Non-OECD nations will provide most of the expected gains in both years. The growth rate is slightly above the previous trend, mostly due to relatively low crude oil prices.”
But crude oil prices have been inching upward—hoovering in the $48 to $50/bbl range, a rebound from historic lows of less than $30/bbl in January and February.
“May marked the third straight month of average price rises in Brent and WTI futures,” the IEA said.
Velda Addison can be reached at email@example.com.
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