‘Real work’ to ease crude oversupply starts post-OPEC deal – IEA

LONDON (ICIS)–The agreement reached by oil producing nations to cut output and encourage price increases will depend on how individual allocations are set for each country, their goodwill to implement such a deal and external events such as continued slowing demand growth, the International Energy Agency (IEA) said on Tuesday.

Crude oil inventories decreased in August for the first time since March, said the agency, although by just 10m bbl, with inventories in industrialised nations – members of the Organisation for Economic Co-operation and Development (OECD) – at a staggering 3,092m bbl.

“Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market – if left to its own devices – may remain in oversupply through the first half of next year,” said the IEA, cooling hopes for a quick fix.

“If OPEC sticks to its new target, the market’s rebalancing could come faster.”

On 28 September, countries within the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut crude output and established a supply target of between 32.5m bbl/day and 33m bbl/day.

Crude oil prices have risen steadily since the deal was announced, and in Monday evening trading in Europe they gained further ground after reports suggested that Russia – which does not belong to OPEC – may also cut output, boosting the international referential benchmark Brent for deliveries in December to $53.22/bbl.

“Now [after the OPEC deal] the real work starts. Apart from setting a supply target of between 32.5m bbl/day and 33m bbl/day, other critical details – like individual country allocations, production baseline and implementation date – need to be finalised when OPEC meets on 30 November,” said the IEA.

“Iran, Libya and Nigeria – all aiming to raise output – are said to be exempt from cuts. A significant rebound in supply from Libya and Nigeria and further growth from Iran would suggest that bigger cuts would have to be made by others, such as Saudi Arabia, to meet the new output target.”

With some OPEC members aiming to raise output, the cuts from other countries will need to be deep and consistent. According to the IEA, OPEC’s 14 members pumped 33.6m bbl/day in September – an all-time high.

The IEA went on to say how the advent of US light tight oil (LTO) extraction in recent years and “OPEC’s free-wheeling strategy” have caused deep changes in the world of oil, with triple-digit prices becoming a reminiscence of better times and crude having been stuck in the $40-50/bbl mark for more than two years now.

“Lower prices at the pump initially fuelled strong gains in demand, but growth has since slowed markedly after subsidy cuts in emerging markets, economic headwinds in some countries and demand saturation in the developed world,” it said.

“The current price of oil has caused discomfort for all producers – even those with hefty financial reserves, such as Saudi Arabia. For high-cost non-OPEC producers the pain has been especially acute. The impact of steep investment cuts made in 2015 is being felt now: nearly 900,000 bbl/day has been lost since a year ago.”

Lower prices have also brought notable cuts in capital expenditure (capex) by large and small companies, said the agency, but many producers around the globe have resisted the downturn better than initially expected.

“Even now, producers such as Russia are showing impressive resilience. So are Middle East OPEC countries whose record-smashing performance has raised the group’s oil output by 1.1m bbl/day from a year ago. The converse is true for demand, with growth slowing from a five-year high in the third quarter of 2015 to a four-year low in the third quarter of this year,” the IEA said.

A colder fourth quarter in the northern hemisphere compared to last year might boost demand for heating fuels, but the Paris-based agency said global demand growth “continues to slow”, a line it has increasingly emphasised in its latest Oil Monthly Oil reports.

Weaker-than-expected crude oil demand in the US in July – in the supposed gasoline-guzzling driving season in that country – and a slowdown in the Chinese industrial sectors are taking their toll on global demand, said IEA.

“Much weaker-than-expected US oil demand data for July pulled down the estimate of overall demand for the third quarter and for the whole of 2016. Growth estimates fell heavily (-415,000 bbl/day in July, y-o-y [year on year]), as upgrades to the baseline series further reduced y-o-y comparisons,” said the agency.

“Chinese oil demand growth has all but vanished in 3Q 2016 compared to a year ago, pulled down by a substantial slowdown in industrial oil usage.

“Some of the slowdown may be temporary due to forced factory closures ahead of September’s G20 meeting in Hangzhou, but the heady gains seen as recently as mid-2015 are unlikely to be repeated any time soon.”

Pictured above: Silhouette of a pump jack in Canada’s Alberta province
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