The International Energy Agency (IEA) warned of a “sobering” outlook for producers, with growing oil output from the US especially making it difficult to sop up the stubborn world oil glut.
“Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply,” the Paris-based energy watchdog said in its latest monthly oil market report.
Although the IEA said demand should pick up in the second half of this year and grow further next year, it also expects supply to continue to be robust, even if Opec and the 11 non-Opec countries supporting its output restraint deal maintain a high level of compliance.
Oil prices, which have been under pressure for the past month, weakened further, with benchmark North Sea Brent crude down 20 cents at US$48.52 per barrel late in the Arabian Gulf day, their lowest level since the “Opec and friends” deal last year.
The IEA said the weak demand growth rate in the first half of the year of less than 1 million barrels per day would accelerate in the second half of the year, so that demand overall for the year would average 1.3 million bpd. This will increase to 1.4 million bpd next year.
But the agency also trimmed its forecast of how much it expected demand to outstrip supply in the second half of this year, from 700,000 bpd to 500,000 bpd, such has been the growth in US supply that has erased much of the impact of Opec/non-Opec cuts.
Supply grew by 585,000 bpd last month alone, with the rapid return of US shale adding to strong gains from Opec’s exempt members.
Additionally, Libya and Nigeria each registered strong growth in output last month, as fields that had been affected by their respective civil conflicts came back online. Both have targeted even further growth this year.
The IEA forecast that non-Opec output will rise this year by 660,000 bpd compared with last year’s decline of 845,000 bpd, then accelerate next year by 1.5 million bpd, led by the US and with gains from Brazil and Canada offsetting declines in the UK, Kazakhstan, Ghana, Congo, Mexico and China.
It noted also that there have been some cracks in the Opec/non-Opec deal, although the leading players – Saudi Arabia and Russia – have a high level of compliance. Iraq’s compliance has been only 55 per cent of its pledged cuts, while the UAE and Venezuela have also been slow to meet their full commitment, the IEA says.
Demand has been erratic so far this year and may continue to be so. Hou Rui, an analyst with S&P Global Platts’ China Oil Analytics, points out that China’s May oil imports grew 4.7 per cent to just above 9 million bpd, their second-highest ever after March’s record. But China’s demand swings back and forth on buying by its newly liberated independent refining sector, which can be volatile because of quota and rule changes.
The IEA repeated the advice it has given in previous reports that those hoping for the market to come back into supply-demand balance should expect it to take some time on current policy.
“Patience is required on the part of those looking for the rebalancing of the oil market, and new data leads us to repeat the message,” the IEA said. “‘Whatever it takes’ might be the mantra,” it said, referencing statements by Khalid Al Falih, Saudi Arabia’s oil minister. “But the current form of ‘whatever’ is not having as quick an impact as expected.”
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