Bears flit in the woods

Author Ben Winkley

Something has to give. So says the IEA, which uses its latest monthly Oil Market Report (OMR) to state boldly that the oil market is not out of the woods yet. In fact, the IEA sees the tree line stretching well out into next year.

Something has to give. So says the IEA, which uses its latest monthly Oil Market Report (OMR) to state boldly that the oil market is not out of the woods yet. In fact, the IEA sees the tree line stretching well out into next year.

The IEA says it has been surprised by some events since its Medium-Term Oil Market Report came out in February. At that time, it said “the extent and the rapidity of the response to falling prices has yet to be tested” in the North American shale industry. But the IEA now says there has been a “persistent vigour of North American supply”. Before, the IEA thought sanctions would “likely have a debilitating effect on Russian production capacity”. Now it says Russia has defied the odds with record-breaking surges in output. And, all the while, Opec members such as Iraq keep on pumping ever more in the battle for market share that is raging inside and outside the organisation.

Overall, the world pumped 3.1mn b/d more oil in June this year than in the same month a year earlier, the IEA says. This oil will have to go somewhere, and it’s likely to go into storage that is already brimming for crude and products in Europe and elsewhere as well as for products in independent storage. It will take some time to drain the tanks when market conditions change.

Because demand is not keeping up. Indeed, the IEA’s first projections for 2016 show demand growth slowing, and it says there could yet be further downside to its forecast should the crisis in Greece prove contagious for the wider European economy. That the IEA’s outlook is based on the IMF’s April World Economic Outlook, rather than this week’s more gloomy report, should give pause for thought, and the IEA’s suggestion that lifting sanctions on Iran could provide some additional demand seems to be a lesson in straw-clutching.

Talks with Iran in Vienna may be stretching the definition of “deadline” to beyond breaking point, but should an agreement be reached, then Tehran will want to push oil out to the world. If Opec’s other main players are not willing to make room, then the group’s output will be higher again in 2016. Should Libya emerge from its turmoil, this would go higher still.

The IEA’s OMR is remarkably bearish — the bottom of the market may still be ahead, it says. Barring a major supply disruption elsewhere, it may also take another price drop for the full supply response to unfold, it says.

Given the noted resilience of US production, such a disruption is still more likely to come from Opec than not. Iraq’s sectarian divide is being exacerbated by worsening relations with its semi-autonomous Kurdistan region and the resultant knock to Baghdad’s export ambitions; Saudi Arabia’s growing domestic oil consumption means its spare capacity cushion has shrunk; and the UAE and Kuwait are struggling to meet their ambitious targets for raising capacity. There is no guarantee on Iran — the smoke signals from Vienna have changed in the past 24 hours and it looks like the sides remain far from an agreement.

For more information, please contact OilBlog@argusmedia.com

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