Oil Price “May Have Bottomed Out”: IEA
By Anthony Jerdine | March 14, 2016
The International Energy Agency released a mixed assessment of the crude oil market Friday, saying “there are signs that prices may have bottomed out,” but cautioning that the recent rally should not “be taken as a definitive sign that the worst is necessarily over” and that they “cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance.” Brent crude oil is trading up 1.6% at $40.70 Friday morning, having recovered from lows around $27 in January.
OPEC Stands Its Ground
The report said that global oil supplies fell by 180,000 barrels per day in February to 96.5 million b/d (mb/d). Output was still 1.8 mb/d above last February’s level, however, showing that oversupply remains a problem. The primary reason is the desire of OPEC, and especially the cartel’s leader Saudi Arabia, to maintain market share by driving higher-cost producers out of business.
The report showed signs that bid may be working. Since last February, non-OPEC production has fallen slightly, while OPEC production has risen. Compared to January, however, OPEC’s February output fell by 90,000 b/d to 31.61 mb/d. Saudi Arabia’s production, on the other hand, inched up from 10.21 mb/d to 10.23 mb/d. The report forecasts non-OPEC production to fall by 750,000 b/d to 57 mb/d in 2016.
OPEC and non-OPEC producers have been in sporadic talks about freezing oil production at January’s levels, which has provided the market with a level of confidence and encouraged the rally in prices. IEA’s report shows that, although talks have not been successful, production fell between January and February anyway. One reason is that supply in the OPEC countries Iraq, Nigeria and the UAE fell by a combined 350,000 b/d in February. There are also “signs that non-OPEC output is falling, the report says.”
Iran is the main sticking point in attempts by producers such as Russia, Venezuela, Saudi Arabia and Qatar to coordinate a production freeze or cut that includes OPEC and non-OPEC members. The country lost significant market share due to international sanctions, and is determined to gain it back, whatever the near-term effect on prices. Geopolitical tensions between Iran and Saudi Arabia have exacerbated the situation, as has the rise of fracking in the U.S.
The IEA left its forecast for 2016 global demand unchanged at 1.6 mb/d. It noted that “sharp decelerations” in the U.S. and China had driven demand growth down to 1.2 mb/d in the fourth quarter of last year, following a five-year high of 2.3 mb/d in the previous quarter. Commercial inventories in the OECD increased by 20.2 million barrels in January, while demand cover remained at a “comfortable” 32.7 days. The report also noted weak refinery throughput in the OECD.
The Bottom Line
IEA sees oil prices stabilizing in 2017, and says that they may already have bottomed out. Ironically enough, closely-watched talk of a coordinated production freeze in February came to nothing, but production ending up falling slightly over the month anyway. For now, the standoff between OPEC producers, led by Saudi Arabia, and non-OPEC producers continues. In addition, the standoff between Iran and Saudi Arabia has fractured the cartel itself. Still, prices have already recovered by over 50% from January lows, so it’s possible – but not guaranteed – that the worst is indeed behind us.
Oil Price “May Have Bottomed Out”