The International Energy Agency says the world oil market appears to be rebalancing, despite lower-than-expected demand in the first part of the year.
“Rebalancing is essentially here and, in the short term at least, is accelerating,” the IEA declared in its latest monthly oil market report, which comes nine days before the May 25 Opec meeting, when the member countries and their outside partners will decide what steps they need to take next to keep that rebalancing on track.
The IEA, a Paris-based energy watchdog for consumer countries, said that Opec and its 11 supporting non-member countries, led by Russia, have been complying fairly well with their deal but noted that the US oil sector has rebounded strongly, while Libya and Nigeria, exempt from Opec’s deal, have also shown strong improvement.
The agency said it is sticking with its forecast for demand to grow by 1.3 million barrels per day, to 97.9 million bpd, over the whole year, despite lower-than-expected demand so far this year. It warns, however, that even with better demand and continued supply restraint, absorbing the enormous glut of oil will be slow going.
“The IEA gave a pretty cautious endorsement of the effectiveness of Opec’s production cuts, anticipating that global inventories would start to see draws from the second quarter onward,” said Ed Bell, the head of commodities research at Emirates NBD bank in Dubai. “But getting inventories close to their five-year average is doubtful with the current scale of Opec’s limited output.”
Demand in the US was particularly disappointing early this year, according to the report, with February demand down 500,000 bpd on the previous year at 19.2 million bpd.
Other poorly performing major oil markets include Germany, Turkey and India, with the latter a big let-down for oil sellers as their hopes have been pinned on the subcontinent to take over from China as the biggest single source of oil demand growth over the next few years.
The IEA said the effects are still being felt of India’s demonitisation policy, where the government bungled its attempt earlier this year to take cash out of the economy – to curb the black market, among other things – thus hurting demand across a number of sectors, including oil products.
China compensated for most of the weakness in the US in the first quarter and is expected to continue to be one of the main growth stories this year, with “robust economic activity and continued expansions in the petrochemical sector [meaning] China [will] account for roughly one-third of global oil demand growth” this year, the IEA reckons.
Furthermore, it is banking on demand coming back strong in India later this year, so that China and India together will account for three quarters of world demand growth for the year.
The IEA is also looking for a sharp upturn in refinery crude runs to make up for slower demand early on this year. “Starting in March, refinery activity is building up and by July global crude throughputs will have increased by 2.7 million bpd,” the IEA predicts.
On the supply side, it noted the continued surprisingly strong performance in the US. After bottoming out last September, output there increased by nearly 465,000 bpd to the end of February to more than 9 million bpd, it’s highest in a year. The IEA now expects US output to increase by 790,000 bpd this year, up by 100,000 bpd from its previous prediction.
Toward the end of the year, even if the producers’ goal of getting inventories toward their five-year average is achieved, “the market will hardly be in a position where it’s short of oil”, says Mr Bell, who notes that the OECD’s stocks will still be higher than when the oil price slump started three years ago in terms of days demand cover. “Russia and Saudi Arabia more or less acknowledged this yesterday when they announced their support for a nine-month extension of the deal,” he says.
There are a number of analysts now seeing the glut lasting well beyond the early part of next year. “In our current base case, we see 2018 as being strongly oversupplied, to the tune of close to 1.5 million bpd in the broader oil complex on average for the year,” says Eugene Lindell, the chief oil analyst at JBC Energy in Vienna. “The potential extension of the cuts programme to the end of March would not alter this picture drastically.”
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