Crude market rebalancing but uncertainty dents optimism – IEA

Jonathan Lopez

13-Jul-2016

Oil rig in the North Sea. (Olaf Kruger / imageBROKER/REX/Shutterstock)LONDON (ICIS)–The recovery in crude oil prices might be a sign the market is rebalancing but economic “precariousness” in Europe, exacerbated by the UK’s vote to leave the EU, could make the process far from smooth, the International Energy Agency (IEA) said on Wednesday.

The Paris-based agency said after the “drama” observed at the beginning of 2016, many crude oil producers will be relieved to see prices having currently stabilised around the high $40s/bbl mark.

The reasons for the price recovery range include a transformation from a major surplus in the first quarter to a “near-balance” in the second, together with robust demand observed in Europe and healthy refinery runs across the globe.

However, refiners might have been refining products for which there was not sufficient demand, the IEA warned.

“In mid-summer 2016, although market balance is upon us, the existence of very high oil stocks is a threat to the recent stability of oil prices: in 1Q16 [first quarter 2016] refinery runs growth was 60% higher than refined product demand growth,” it said.

“Despite the regular upwards revisions to demand that we have seen in recent [Oil Market] Reports there are signs that momentum is easing; and, although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices.”

Although refinery runs are forecast to have fallen during the second quarter by 800,000 bbl/day, said the IEA, they will surge again to average 2.4m bbl/day in the third quarter helping ease the glut but, unless demand is stronger than expected, stocks of crude oil products could “threaten the whole price structure” once again.

“Somewhat unexpectedly, the saving grace for oil demand has been Europe where, in 2Q16 y-o-y [year on year] growth reached a five-quarter high,” said the IEA.

“This is unlikely to last, though, with the ongoing precariousness of the European economies now dealing with added uncertainty following the result of the UK referendum on membership of the European Union.”

Unlike the Organization of Petroleum Exporting Countries (OPEC), which on 12 July said uncertainty linked to Brexit  the UK’s vote to leave the EU  will cause a sharp deceleration in the country’s GDP in 2017, the IEA said it is too early to assess the effects of the 23 June referendum in the crude markets and the UK economy.

Crude oil demand growth
January 2014-March 2016

Crude oil demand, 1Q 2014-1Q 2016. Source: IEA
In thousand bbl, left column.
Source: IEA

On the supply side, the Agency said Middle East producers are gaining the battle to keep market share as Iraq and Iran’s crude output increases, as their production costs have helped them water the low-price environment better than the newest producers in the US.  

In fact, production from countries outside the Middle East-dominated OPEC is actually on course to fall by 900,000 bbl/day in 2016, said the IEA, before making a small recovery in 2017.

“In the heady days when US shale production was moving upwards very fast it became fashionable to talk of lower reliance on traditional suppliers. Our chart shows that in fact oil output from the region [Middle East] rose to a record high in June, with production above 31m bbl/day for the third month running,” said the IEA.

“As such, the Middle East’s market share of global oil supplies rose to 35%, the highest since the late 1970s and an eloquent reminder that even when US shale production does resume its growth, older producers will remain essential for oil markets.”

Middle East crude oil market share
Historic 1971-June 2016
Middle East crude oil market share, historic 1971-June 2016. Source: IEA
Left column, global crude oil production, million bbl
Right, Middle East market share
Source: IEA

The “ominous investment gap” observed in the crude oil industry since 2014, when crude oil prices declined sharply and caused oil major across the globe to put many new production or expansion projects on hold, could create the conditions for “sharply higher” prices in the medium term, although that would always depend on how quickly current high crude oil stocks are eroded, the Agency said.

“Our underlying message that the market is heading to balance remains on track, but the modest fall back in oil prices in recent days to closer to $45/bbl is a reminder that the road ahead is far from smooth.”

The Agency revised slightly upwards its forecast for crude oil demand in 2016 after Europe surprised on the positive in the first half of the year, expecting global demand growth to stand at 1.4m bbl/day this year to average 96.1m bbl/day, an increase of 100,000 bbl/day compared to estimates published in June.

In 2017, the world’s economy is expected to demand 97.4m bbl/day of crude oil, an increase compared to 2016 of 1.3m bbl/day.

The majority of the projected upside in 2017 is attributable to countries outside the 34 developed-economies club, the Organisation for Economic Co-operation and Development (OECD), with Asian economies particularly increasing their demand.

The IEA continues seeing India as the country with demand growing the most, expected to rise in 2017 by 280,000 bbl/day, followed by China.

(Image source: Olaf Kruger / imageBROKER/REX/Shutterstock)

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