Opec is on output curb ‘probation’, says IEA

The energy watchdog is waiting to see if the cuts are credible and can reverse a supply glut by enough to balance the market.

The IEA noted that comments by Saudi Arabia’s energy minister, Khalid Al Falih, last week in Abu Dhabi underlined the fragile state of the market. Nezar Balout / AFP

The International Energy Agency says Opec is in a six-month “probation period” as the world oil market waits to see if its output-curbing efforts are credible and can reverse the supply glut.

“It is far too soon to see what level of compliance has been achieved,” the Paris-based energy consuming countries’ watchdog said yesterday in its monthly oil market report.

“The coming weeks will provide more clarity and in the meantime developments elsewhere in the oil supply/demand balance are very intriguing,” it added.

The IEA said that demand improved last year more than it had estimated, driven primarily by higher-than-anticipated European and Chinese demand.

Cold temperatures as well as industrial demand in Europe helped propel the purchase of diesel and liquefied petroleum gas in the final quarter of last year, especially in some of the larger markets – the UK, Germany, France, Sweden, Belgium, the Netherlands, as well as Turkey.

In China, petrochemicals was a major factor in a late-year surge that pushed oil demand up by 460,000 barrels per day in November to 11.9 million bpd and probably to 12.1 million in December.

The IEA expects that China’s oil demand growth over the whole of last year averaged 360,000 bpd, although it is expecting that will slow to 335,000 bpd this year, unless the economy performs better than expected.

For the whole of last year, the IEA is now expecting that world oil demand grew by 1.5 million bpd, 100,000 bpd higher than it previously forecast, with this year forecast to grow at a slower 1.3 million bpd.

On the supply front, the think tank notes that output in the US has begun to rise again, especially in the shale oil sector, which had been badly hit by the oil price slump.

“The outlook for US oil production for 2017 has materially improved”, because of higher oil prices following the deal by Opec and 11 non-Opec producers to cut output by about 1.8 million bpd from January through June, the IEA said.

The IEA forecasts total oil output to rise in the US this year by 520,000 bpd to about 9.4 million bpd.

“But it is not all about the US” in terms of non-Opec supply, the IEA notes. With supply increases from some regions, including Brazil and Canada, and declines elsewhere, it is forecasting net non-Opec supply growth this year of 380,000 bpd.

The IEA noted that comments by Saudi Arabia’s energy minister, Khalid Al Falih, last week in Abu Dhabi underlined the fragile state of the market.

“By saying that an extension was ‘unlikely’, he has issued a powerful reminder that if stocks are drawn in the first half of 2017 by the approximately 700,000 bpd implied by Opec producing close to its target, with support from other producers, the market will have tightened and prices stabilised but not at a sufficiently high level to allow another bonanza for high cost producers,” IEA analysts say.

In other words, the Saudi minister’s comments on the likelihood of an extension – which are challenged by a wide number of neutral observers, who argue that it will take a year, maybe two years, of output-constraint to sufficiently eat into the oil inventory glut – are an attempt to keep a lid on prices so that they don’t overheat and encourage back high-cost production too soon.

“It’s a matter really of working off the global inventory levels and that is a protracted process,” said Helima Croft, the head of commodity research at RBC Capital Markets.

“We don’t talk about prices being $60 or $70 in the next quarter because we do have to work off these inventory levels,” which is likely to take years.

Patrick Pouyanné, the chief executive of French oil major Total, agrees: “These agreements will have to be implemented by all actors because the market is still fragile. Getting supply equal to demand could come in six months but … you need to be able to eliminate these huge inventories and you don’t do this in six months. You need more like two years.”

“In the meantime, the market awaits the outcome of the output deal,” the IEA says.​​

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