OPEC’s relentless output increase before their November deal to curtail supply has led to the first global stocks increase in six months, the International Energy Agency (IEA) said on Wednesday, noting that the market needs time to see a significant drawdown, expecting an implied deficit of 500,000 bpd for the first half at current production levels and supply and demand fundamentals.
According to IEA data, total OECD oil stock levels confirm the legacy of higher production at the end of last year. Global inventories had started falling in August from record high levels, and by end-December they had dropped by 120 million barrels, an average decline of almost 800,000 bpd, IEA said.
“However, in January we saw an abrupt about turn with OECD stocks increasing by 48 mb (1.5 mb/d) and preliminary data for February suggests they have fallen back again only modestly,” the agency noted.
Export volumes are still in storage around the world, and U.S. stocks are building, the IEA said. In the U.S., supply is currently building in three ways: imports are rising (and so are exports), domestic output is growing, and refinery utilization is dropping.
The global market has yet to digest “a vast amount of past supply, which will take time to work its way through the system”, the IEA noted.
At the same time, the demand growth outlook for 2017 remains unchanged at a healthy 1.4 million bpd, following three previous upgrades in IEA estimates. Related: Why Last Week’s Oil Price Crash Was Inevitable
Beyond concerns over yet-to-be absorbed production and rising non-OPEC output, the IEA sees – again – a solid start to OPEC’s compliance to the cuts. After noting last month that OPEC’s supply-cut deal achieved a record initial compliance rate of 90 percent, the IEA said today that compliance for January and February averaged 98 percent, as Saudi Arabia – with an estimated 135-percent rate – is the main factor behind the high compliance rate of the group.
Among the 11 non-OPEC producers that had joined the deal, compliance was 37 percent, dragged low in large part by Russia’s sluggish cuts.
The takeaways from today’s report could be the two last sentences in it:
“For those looking for a re-balancing of the oil market, the message is that they should be patient, and hold their nerve. In the meantime, the volatility that suddenly broke out last week will probably recur, as the IEA has regularly warned.”
By Tsvetana Paraskova for Oilprice.com
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