IEA says oil supply deficit likely in H1 2017

The oil market is likely to move into a supply deficit in the first half of 2017 if OPEC and non-OPEC producers stick to agreed output cuts, the International Energy Agency said today.

In its final report of the year, the agency noted the dramatic shifts in the oil market this year, with prices dropping below $30 in January to recent increases above $55 following the first major deal including non-OPEC producers since 2001.

Read: OPEC, non-OPEC agree first global oil pact since 2001

The organisation said that OPEC’s agreed production cut of 1.2 million barrels per day (bpd) was almost equal to the group’s 1.3 million bpd increase in the 12 months to October 2016.

In contrast the non-OPEC group saw its crude output fall by about 900,000 barrels per day during the same period.

“If OPEC promptly and fully sticks to its production target, assessed at 32.7 million bpd, and non-OPEC producers deliver the agreed cuts of 558,000 bpd outlined on December 10, then the market is likely to move into deficit in the first half of 2017 by an estimated 600,000 bpd,” the IEA said.

Beyond the first half of the year, the IEA said its analysis was complicated by the fact that the current OPEC deal is for six months and will be reviewed at the end of May.

This could mean “production restraint might not be extended”, the organisation said, which may make high-cost producers think twice before approving new investments.

“OPEC also appears to be signalling that high-cost producers should not take for granted that they will receive a free ride to higher production,” the IEA said.

Whether production cuts are actually implemented as agreed will be watched closely in the coming weeks, with some speculating OPEC will only achieve half of the cuts promised.

Read: OPEC expected to deliver only half of oil production cut

But the IEA said time should be allowed for the cuts to be implemented before it reassessed its market outlook.

“Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices,” the organisation warned.