IEA takes oil market bulls to the slaughterhouse

oil-drillingPARIS: Oil prices may have rebounded off 12-year lows struck last month, but any hope for a broader recovery in the market would be misplaced, the IEA said Tuesday, noting OPEC is responsible for the latest glut of supplies on the market.

The International Energy Agency said in its monthly report that “it is very hard to see how oil prices can rise significantly in the short term … with the market already awash in oil…”

On the contrary, it said “…the short term risk to the downside has increased”.

Crude prices collapsed from over $100 per barrel in July 2014 to under $30 last month on falling Chinese growth and as the OPEC oil cartel stepped up output in an attempt to force out higher-cost production.

While low oil prices are usually good for oil consuming nations and global economic activity, investors have uncharacteristically begun taking the oil price as a proxy for economic demand, roiling global markets in volatility.

The market dived on Tuesday once again after the IEA also forecast the global oil surplus would be larger than previously expected in the first half of this year.

“The IEA, like many other forecasters, think that the excess could grow if output from the OPEC increases further, a probable outcome given that Iran is now in the process of making a full return to oil the market,” City Index analyst Fawad Razaqzada said in a note.

After the price for the main international oil contract struck a low below $28 last month, it rebounded to above $35.

The IEA said “before victory over the bearish forces is declared we should look at the main factors driving the optimism”.

It then proceeded to debunk the factors driving the market higher, first among them the prospect of an agreement between OPEC and non-OPEC nations to cut output.

The IEA said “the likelihood of coordinated cuts is very low”.

OPEC glut

Another widely-held view in the market is that increases will slow in OPEC production, except for Iran which is returning to the market after years of international sanctions, said the IEA.

But it pointed out that Iraqi production struck a new record in January and that there are indications Saudi Arabia has stepped up shipments.

The Paris-based IEA, which advises oil consuming nations on energy issues, noted that OPEC is currently responsible for the glut of supplies hitting the market the past year.

While non-OPEC production levels are roughly flat from one year ago, at 32.6 mbd in January, OPEC supplies were up by 1.7 million barrels per day (mbd) from a year earlier.

“It is OPEC’s business whether or not it makes output cuts either in alone or in concert with other producers but the likelihood of coordinated cuts is very low,” said the IEA.

At current levels, OPEC production means oil stocks are likely to increase further, it added.

Another driver of the recent bullishness in the crude market has been the view that low oil prices will boost growth in demand.

But the IEA said it holds on to its “…view that global oil demand growth will ease back considerably in 2016” to 1.2 mbd from a five-year high of 1.6 mbd in 2015.

It trimmed by 0.1 mbd its forecast for world oil demand in 2016 to 95.6 mbd.

Any change likely downward

The International Monetary Fund last month cut its forecast for global growth this year by 0.2 percentage points to 3.4 percent.

While this would still be an improvement from 3.1 percent in 2015, the IEA noted the forecast is “heavily caveated with risks to growth in Brazil, Russia and of course slower growth in China,” noted the IEA.

“Economic headwinds suggest that any change will likely be downwards,” it added.

The IEA also expressed doubt that the value of the US dollar, the currency in which oil is traded, could serve to boost consumption.

While the dollar has dipped in recent weeks as prospects of fresh interest rate hikes recedes, thus making oil cheaper to buy in other currencies, the IEA noted concerns over the state of the global economy work in favour of the US currency given its safe haven status.

The IEA, which forecasts a net drop of 0.6 mbd in 2016, noted that drops in production have so far been slower than the market has predicted.

“Perhaps resilience still has some way to go,” it said.

In late afternoon deals in London, Brent North Sea crude for delivery in April dived $2.25 to $30.63 per barrel, while US benchmark West Texas Intermediate for March delivery shed $1.07 to $28.62.