Downside risks for crude oil price persist – IEA

LONDON (ICIS)–The International Energy Agency (IEA) said on Tuesday crude oil prices still face downside risks as Iran, Iraq and Saudi Arabia continue to “turn up the taps” on supply and economic risks in Russia, Brazil and China still loom on the horizon.

While crude output from countries outside the Organisation of Petroleum Exporting Countries (OPEC) is expected to decrease by 600,000 bbl/day in 2016, to reach 57.1m bbl/day, production in countries within the oil cartel is expected to rise as Iran returns to the market, said the IEA.

“Global oil supply dropped 200,000 bbls/day to 96.5m bbls/day in January, as higher OPEC output only partly offset lower non-OPEC production. Non-OPEC supplies slipped 500,000 bbls/day from a month earlier to stand close to levels of a year ago,” it said.

“OPEC crude oil output rose by 280,000 bbls/day in January to 32.63m bbls/day as a sanctions-free Iran, Saudi Arabia and Iraq all turned up the taps. Supplies from the group during January stood nearly 1.7m bbls/day higher year on year.”

The IEA said prices could stay low for a prolonged period of time, although dismissed analysis oil could reach values as low as $10/bbl.

“Perhaps some of the more fevered forecasts of oil prices falling to as low as $10/bbl are extreme and better days do lie ahead for oil prices. However, before victory over the bearish forces is declared we should look at the main factors driving this optimism,” said the IEA.

In its monthly Oil Market Report ahead of the publication, on 22 February, of its Medium-Term Oil Market Report, 2016, the Paris-based Agency numbered five factors which should keep crude oil prices depressed in coming months.

During the past weeks, persistent reports about a deal between OPEC and non-OPEC producers to cut production, which would raise prices, was dismissed by the IEA as “speculation” as the likelihood of coordinated cuts is low. Linked to that factor would also be the return of Iran to the oil markets, adding to an already over-supplied market.

The IEA added a third factor of bullishness is that low prices would consequently raise demand for crude oil and its derivatives, although it lowered its optimism and left its demand forecast unchanged for 2016 as negative economic data continues to mount.

“We retain our view that global oil demand growth will ease back considerably in 2016 to 1.2 mb/d – at 1.2% still a very respectable rate – but our analysis so far sees no evidence of a need to revise it upwards,”

“Estimates by the International Monetary Fund that global GDP growth in 2016 will be 3.4% followed by 3.6% in 2017 is heavily caveated with risks to growth in Brazil, Russia and of course slower growth in China. Economic headwinds suggest that any change will likely be downwards.”

The IEA added that despite recent falls in the value of the US dollar against other major currencies, which reduces the “perception” of cheaper imported oil, its forecast for 2016 regarding the dollar is that the falls will be short-lived and will remain strong throughout the year.

Bullish assumptions in increasing crude prices also take into account a fall of output from non-OPEC economies. While the 600,000 bbl/day prediction from the IEA could end up being higher, it also showed its surprise that output from non-OPEC – especially from US shale producers – is not falling quicker and to a larger extent.

“The number [600,000 bbls/day decrease] could be higher of course and many senior international oil company figures have said so but there is a lingering feeling that the big fall-off in production from US shale producers is taking an awful long time to happen. Perhaps resilience still has some way to go.”

The IEA also predicts the oversupplied oil markets will remain so during this year, with stock builds at 2m bbls/day during the first quarter, which will be followed by stock builds of 1.5m bbls/day during the second quarter. Moreover, the stock build for the second half of the year would average 300,000 bbls/day, the IEA added.

“If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short term risk to the downside has increased,” it concluded.