The rebalancing of the oil market is taking too long, the International Energy Agency (IEA) said in its Oil Market Report on Thursday.
Since the record net long position that money managers built in February on hopes that OPEC’s cuts would rebalance the market, investors’—and industry bodies’—confidence has been waning.
“Brent prices have closed below $50/bbl each day since early June and few investors expect a recovery anytime soon,” the IEA said.
Since the start of the production cuts, some issues have been popping up each month to raise doubts about the rate at which the market is rebalancing, the agency noted, adding:
“This month, there are two hitches: a dramatic recovery in oil production from Libya and Nigeria and a lower rate of compliance by OPEC with its own output agreement.”
Libya and Nigeria contributed the most to the 393,000-bpd increase in the cartel’s total crude output in June compared to May. Libya’s output jumped by 127,000 bpd to 852,000 bpd, while Nigerian crude production rose by 96,700 bpd to 1.733 million bpd.
According to the IEA, compliance among OPEC members slipped in June to its lowest level—78 percent—since the start of the deal, as not only exempt Libya and Nigeria pumped more, but also Saudi Arabia. Although OPEC’s biggest producer stayed within the limits, according to OPEC’s secondary sources, it did not overcomply with its share of the cuts as much as it had done in previous months.
“In passing, it is worth noting that compliance from the ten non-OPEC producers who volunteered to cut production improved to 82% in June, higher than the rate achieved by OPEC,” the IEA said.
Last month, global oil supply rose by 720,000 bpd to 97.46 million bpd as producers opened the taps. “Output stood 1.2 mb/d above a year ago with non-OPEC firmly back in growth mode. Non-OPEC production is expected to expand by 0.7 mb/d in 2017 and 1.4 mb/d in 2018.”
As for OECD industry stocks, whose drawdown to the five-year average is OPEC’s key goal with the cuts, the IEA has estimated that OECD industry stocks dropped by 6 million barrels in May on lower imports of crude and products. Stocks were 266 million barrels above the five-year average in May, down from 300 million barrels in April. Preliminary data show a moderate reduction in OECD stocks for June, according to the IEA.
On a positive note, the international agency said that “For global demand, after lacklustre 1.0 mb/d growth in 1Q17, there was a dramatic acceleration in 2Q17 to 1.5 mb/d. For 2017 as a whole, demand is forecast to reach 98.0 mb/d, with growth revised up by 0.1 mb/d compared to last month's Report to 1.4 mb/d. Further growth of 1.4 mb/d is foreseen for 2018, with global demand reaching 99.4 mb/d.”
“Financial data suggests that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around $50/bbl to maintain production growth.”
However, the IEA added that “Such is the resilience of the US shale sector that we should be careful to pronounce that its expansion will slow, however it could be that the recent exuberance is being reined in.”
As for when the market would balance, the IEA is no longer as confident as it was in the April report when it said that “it can be argued confidently that the market is already very close to balance”. Related: Are Supermajors Spooked By Peak Oil Demand?
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“Taking demand and supply together, the current market balance implies a global stock draw of 0.7 mb/d in 2Q17,” the IEA said today, adding that actual stock numbers currently do not support this picture.
“Thus, we need to wait a little longer to confirm if the process of re-balancing has actually started in 2Q17 and if the waning confidence shown by investors is justified or not,” the agency concluded.
By Tsvetana Paraskova for Oilprice.com
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