Oil markets expected to reach balance
Demand forecast to grow for 2016, International Energy Agency says
Global demand for oil could outpace supply in the second half of 2016, the International Energy Agency said Thursday, indicating an eventual balance in oil markets that have been brimming with crude for nearly two years.
The Paris-based agency said in its monthly oil market forecast that it foresees “essentially no oversupply ” in its balances heading into 2017 as international demand continues to grow.
Oil demand growth is expected to reach 1.4 million barrels per day in 2016 but will slow to 1.2 million barrels per day in 2017, the IEA said. Growing oil production in the U.S., Canada and some OPEC member states over the past 18 months has helped to prolong a supply imbalance that has continued to push prices downward.
That global oversupply averaged 900,000 barrels per day in 2014, then increased to two million barrels per day in 2015. Prices for benchmark crude West Texas intermediate, meanwhile, plummeted to US$27 in February, the lowest in more than 10 years.
The most recent projections from the IEA signal a long-awaited return to a more balanced market. In the third quarter of this year production could fall behind supply by one million barrels per day, it said, which would lower oil storage volumes.
However, oil markets are as uncertain as ever. Analysts have repeatedly prematurely predicted a return to balance over the past year. In a report published earlier this year the IEA said analysts “widely believed that this would happen by the end of 2015 but that view has proved to be very wide of the mark.”
The persisting glut is in part due to concerns over international oil demand, which has slowed in recent years as a result of weaker economic activity in some of the world’s largest growth markets.
U.S. shale producers have also proven more resilient than expected. Average U.S. oil production in May was 8.8 million per day, down from its 2015 peak of 9.6 million. But in its latest estimates the U.S. Energy Information Administration increased its prediction for average production through 2016.
OPEC member state Saudi Arabia has ramped up production to record levels during the oil glut, while the expectation of production growth in markets like Iraq, Iran and Libya also hampered the rebound.
However, some analysts say those predictions were either overblown or have already reached their limits.
Iranian oil production spiked in the first half of 2016 after international sanctions were lifted, growing by more than 500,000 barrels per day in a matter of months. Its production capacity has nearly reached its pre-sanction production levels of 3.8 million barrels per day.
But that growth has more or less peaked, according to Homayoun Falakshahi, an analyst with Wood Mackenzie. Much of the country’s production growth came from its aging southern oilfields that are fast declining.
“It’s been quite a big success story over the last few months, but now it’s getting a little more challenging to get back to those previous levels of production before sanctions.”
He says new production is coming online in the Azadegan and Yadavaran fields near the Iraq border that should help to offset some of the declines. The state-run National Iranian Oil Company (NIOC) has said it wants to reach production of four million barrels per day, though it has missed that target in the past.
Meanwhile, violent outbreaks and civil unrest in Nigeria, Venezuela and Libya have smothered most expectations of a prompt return to normalcy.
In July of 2016 global supplies increased by 800,000 barrels per day, the IEA said.