In its latest monthly market report released early on Friday, the International Energy Agency forecast that oil prices may have bottomed as shrinking supplies outside OPEC and disruptions inside the group erode the global surplus. This comes just one month after it had a far gloomier assessment of oil prices, warned on excess supply, and asked if the market was witnessing a "false dawn."
“There are signs that prices might have bottomed out,” the Paris-based adviser said. "For prices there may be light at the end of what has been a long, dark tunnel” as market forces are “working their magic and higher-cost producers are cutting output."
It predicted that production outside the Organization of Petroleum Exporting Countries will decline by 750,000 barrels a day this year, or 150,000 barrels a day more than estimated last month, the agency said. Markets are also being supported by output losses in Iraq and Nigeria, as well as Iran’s unexpectedly slow return to production following the end of international sanctions, Bloomberg reports.
As a reminder, on February 9, the IEA said "supply may exceed consumption by an average of 1.75 million barrels a day in the period, compared with an estimate of 1.5 million last month." Curiously since then prices are far higher, and are now pushing into territory where even shale companies are considering resuming production.
As shown in the chart below, oil prices have recovered 50 percent from the 12-year lows reached in early February when news of possible oil production cuts by OPEC unleashed a dramatic rally; instead all that was unveiled was a tentative production "freeze", one which may never happen as Iran has sternly refused to comply with the term. This “freeze” which caps Russian and Saudi production at already record high levels, while currently supporting prices, is unlikely to have a substantial impact on markets in the first half of the year, the IEA said.
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As Bloomberg writes, the agency’s view on prices is a shift from last month’s report, in which it said that crude could sink further as the market remained “awash in oil.” Brent futures traded at about $40 a barrel in London on Friday. In retrospect, this appears like nothing more than a case of the market making the news, and in this case, analysis.
Still, the outlook for the balance of supply against demand in the first half is “essentially unchanged” from last month, the IEA said. World oil consumption will increase by 1.2 million barrels a day, helping to reduce the global surplus from 1.7 million barrels a day in the first half to 200,000 a day in the last six months of the year. Last month it projected the second-half surplus would be 300,000 a day. The agency repeated that it could lower the demand estimate as the price recovery curbs U.S. appetite for gasoline.
In other words, everyone is guessing not only what supply will do, but when demand will finally come back; for now there hasn't been a notable change in either, and in fact in the last DOE number, U.S. producers actually saw a pick up in production.
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More interestingly, and related to our report earlier this week about some 550 million "missing" barrels of oil, the IEA increased its estimate of oil in floating storage/transit for 2015, moving more than a qtr of the volume it had previously categorized as "miscellaneous-to-balance" in its supply/demand tables. The revision to the quarterly figures in latest monthly report issued today shows "a portion of these volumes were misallocated in 2015." As a result, the IEA now sees 72 million bbl of crude stored in tankers at end-Feb., up ~17 million bbl from a year ago; this includes 42 million bbl of crude, condensate in Iranian tankers.
Despite the adjustment, this still means that there is nearly half a billion barrels of oil "out there, somewhere" which remain unaccounted for.
So while the IEA report served to boost the price of oil, roughly at the same time Goldman released its own report, reiterating a well-known warning on inventory constraints, and repeating that oil prices may drop "sharply lower" as US "storage saturation" is reached:
While supply responses and US stock draws on the horizon suggest price lows may have been set, the risk that US storage saturation pushes prices sharply lower in coming weeks remains high in our view. Current US inventory builds are setting new record highs for storage utilization and we expect these builds to continue through April. Further, the risk of petroleum product storage saturation pushing refinery runs lower in the face of strong imports could more than offset US production declines.
Related: Why Saudi Arabia Has No Intention To End The Oil Glut
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For now the market continues to ignore the near-term fundamentals, and to hope that production cuts and demand increases will normalize the crude market, even as key shale companies made it clear that once oil hits $40, production is going back on line. As of this moment, crude is right around that level.
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