The UAE and Saudi Arabia pumped oil at record monthly rates last month as Opec forged ahead with its strategy to hold market share even as the world market appears still to be oversupplied, the International Energy Agency said.
The Paris-based IEA, the main energy think tank for the wealthy countries of the OECD, in common with many other respected market analysts has had trouble figuring out exactly why oil prices have recovered strongly during the first half of the year, while there still appears to be an excess of production.
World benchmark North Sea Brent crude futures were down 90 cents at US$64.80 in late UEA afternoon trading. They traded at a low of just above $45 a barrel in January after last year’s price collapse, but recovered from mid-April this year to trade steadily about $65 a barrel since then.
In its latest monthly report, the IEA says that some unexpected shortfalls in the refining sector have supported oil prices of late.
“These [refining sector] imbalances could go some way towards resolving an apparent disconnect between crude prices and fundamentals,” the IEA report stated.
“On the one hand, prices appear to have stabilised after staging a partial recovery earlier this year ... On the other hand, inventory builds continue amid signs of persistent oversupply.”
The agency explained that, while demand in the first quarter for oil and oil products – such as petrol and jet fuel – has surged overall by 1.7 million barrels per day (bpd) over last year – the output from the refinery sector has lagged well behind that level since the start of the year, partly due to delays in starting up “mega refineries” at Yanbu in Saudi Arabia and at Ruwais in UAE, as well as several plants in South America.
The shortfall in refined products was most acute in non-OECD countries, where demand growth was three times the added production in the first half of the year.
However, the IEA said the world oil market still looks vulnerable because overall production is still running well ahead of demand, with the excess going into storage tanks.
Demand growth in the first half of this year is running 25 per cent above its earlier prediction at 1.6 million bpd, the IEA said. But supply continues to rise by nearly double that, so that worldwide inventories of crude and refined products are running at their highest levels since 2009, the IEA said.
China stands out as it fills the huge number of new storage tanks built recently.
The IEA estimates that it added a record 33 million barrels in April and hardly slowed down last month, and accumulated an additional 90 million barrels of strategic oil inventory in the first five months of the year.
Other elements that have been supporting the oil market include the continued tensions in or near important oil producing countries, including the ongoing conflicts in Iraq, Libya, Yemen and Nigeria.
Tom Pugh, a commodities analyst at Capital Economics, pointed out that even though production has risen within the group the spare capacity within Opec to deal with any major disruptions is tight.
“The amount of spare capacity that Opec [mainly Saudi Arabia] has to deal with any unexpected falls in production is much lower than it has been over the last few years,” he said, which he put at about 1.7 million bpd, down from 2.7 million bpd two years ago. But like the IEA, Mr Pugh sees the market was poised for weakness this year if trends persist. “Even [with higher demand forecast], any extra demand could easily be met out of stocks,” he said.
The IEA sees it the same way and expects pressure on prices once the refineries get going again. “Product imbalances have likely been a key factor behind recent oil price strength, and that particular source of support might soon wane as long-delayed refineries eventually reach full production.”
amcauley@thenational.ae
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