IEA says oil market rebalancing has begun, potential stock draw in Q4 2016

The latest forecast from the International Energy Agency shows stronger than anticipated demand and non-OPEC supply growth swinging into contraction next year.

The current supply overhang is expected to persist through 2016, the organisation said, suggesting global inventories will continue to increase.

The IEA found that oil’s plunge below $50 per barrel from over $100 a year ago has seen demand react more swiftly than supply. The world is expected to use 1.6 million barrels per day more as a result, the group said. The highest demand growth in five years and a dramatic increase from the 0.7 million barrels a day seen in 2014.

Global supply continues to crow at “breakneck pace” the organisation said, at 2.7 million barrels per day higher than a year earlier – despite a collapse in oil prices.

This is partly due to OPEC’s Saudi-led pumping strategy, with the former and Iraq increasing the group’s flows to 31.8 million barrels a day, the highest in three years. Since last November, output from the cartel has increased by 1.4 million barrels a day – with no decrease in sight.

Despite this, OPEC accounted for just over half of the annual increase in world oil supply. The IEA said non-OPEC output growth had decreased from the heights of 2014 but was still 1.2 million barrels a day higher than a year earlier. This was thanks to previous investments.

Oil’s recent second move below $50 per barrel has prompted major oil companies and independents to revisit and scrap investment plans, the IEA said, meaning output is likely to be hit. Non-OPEC supply growth is expected to slow down through to end-2015 and decline in 2016, with the US bearing the brunt.

“Even with the slowdown in non-OPEC production and higher demand growth, a sizeable surplus remains. Our latest balances show that while the overhang will ease from a staggering 3.0 million barrels per day in Q2 2015, its highest since 1998, the projected oversupply persists through H1 2016,” the IEA said.

Assuming OPEC production continues at 31.7 million barrels per day through 2016, supply will exceed demand in the second half of 2015, testing storage limits globally. The IEA forecast this surplus could decrease to 850,000 barrels a day in 2016, with Q4 2016 the first quarter of a potential stock draw.

However, the organisation’s outlook does not include potentially higher Iranian output if sanctions are lifted.

“Against this backdrop, many participants in the oil industry have adopted a new mantra – ‘lower for longer’. But how low and how long? While reduced capital spending will help rebalance the market in the short term, it will no doubt also lead to lower future supply growth. This will become increasingly sensitive if demand continues above-trend, as it has so far in 2015,” the IEA said.