No end in sight for oil glut

The world’s oil glut will not be resolved this year and stockpiles could continue to swell as production levels remain undimmed.

This was the view of the International Energy Agency (IEA), which has warned of a “false dawn” in oil prices following their recovery from January lows.

Crude has rallied from a 13-year low struck in January. Brent slumped to $28 a barrel, but has since risen to $33-35, around one-third of the $115 peak hit in the summer of 2014.

The Organization of Petroleum Exporting Countries (Opec) is unlikely to agree a deal to reduce production and declines in US production will take time to feed into the market, meaning that the world will remain “awash” with crude for some time to come.

“Persistent speculation about a deal between Opec and leading non-Opec producers to cut output appears to be just that: speculation. It is Opec’s business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low,” the IEA said.

Outlook trimmed

Global oil demand peaked at a five-year high of 1.6 million barrels per day (mb/d) in 2015, but this will “ease back considerably” in 2016 to 1.2 mb/d. Demand will be by notable slowdowns in Europe, China and the United States, said the Paris-based agency in its February Oil Market Report.

Supply dropped 0.2 mb/d to 96.5 mb/d in January, as a fall in non-Opec production began to feed into the market.

Non-Opec supplies slipped 0.5 mb/d from a month earlier, but Opec crude oil output rose by 280,000 barrels per day in January to 32.63 mb/d “as Saudi Arabia, Iraq and a sanctions-free Iran all turned up the taps”. January Opec output was nearly 1.7 mb/d higher year-on-year.

OECD commercial stocks built by 7.6 million barrels (mb) in December to stand at 3,012 mb at the end of the month, which was 350 mb above average.

Refined products covered 32.3 days of forward demand, which was 0.1 day above the level at end-November. The IEA said that preliminary readings indicate that inventories have continued building into January.

Global refinery runs fell by 1.3 mb/d in January to 79.8 mb/d, largely due to seasonal factors. “Global throughputs nevertheless stood more than 1.7 mb/d above a year earlier, with gains particularly strong in the United States and the Middle East,” the agency added.

Prices

Continued high output and slack demand is clearly going to impact prices, said the IEA.

“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 said.

By the time the report was released on Tuesday (February 9th), however, oil was rising as a weaker dollar lifted commodity prices. US light crude gained two per cent and Brent was up by more than one per cent as the greenback hovered just above a three-month low.