A massive oil glut may weigh on world markets deep into next year unless the OPEC producer cartel makes good on its promise to cut output, the International Energy Agency (IEA) said on Tuesday.
The oil price has recovered steadily since OPEC said last month that it would reduce production, with details to be hammered out at the cartel’s November meeting, and such a deal would “speed up the process” of working off global oil inventories, the IEA said in its monthly report.
“Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market — if left to its own devices — may remain in oversupply through the first half of next year,” the IEA said.
“If OPEC sticks to its new target, the market’s rebalancing could come faster,” it said.
Initially greeted with scepticism among analysts, OPEC’s agreement to cut output has gained traction in the oil market, with the IEA noting that the oil price has risen by 15 percent since the cartel’s announcement on September 28.
Oil prices rose to their highest level in several months after Russian President Vladimir Putin said Monday that his country, not a member of the cartel, was ready to align with OPEC’s push to limit oil output.
In morning European trade Tuesday, both WTI and Brent held well above the key $50 (45 euro) level per barrel, at $50.90 and $52.89, respectively.
“The waiting game is over,” the IEA said. “OPEC has effectively abandoned its free market policy set in train nearly two years ago.”
– ‘Free-wheeling’ no more? –
OPEC members, led by kingpin Saudi Arabia, have been pumping oil at record levels to gain market share over higher-cost rivals, in what the IEA Tuesday called a “free-wheeling strategy”.
The Paris-based agency said that crude supply from OPEC’s 14 members stood at an all-time high in September.
The cost has been a dramatic fall in the oil price since 2014, causing acute financial pain for all producers, “even those with hefty financial reserves, such as Saudi Arabia”, the IEA said.
Producers lacking such deep pockets, like Nigeria, have been plunged into budgetary and foreign exchange crises.
But OPEC may finally be turning the page.
“Now with the market share war coming closer to an end, we can say that the worst for oil is behind us,” said Hussein Sayed, chief market strategist at FXTM, a brokerage.
At its September meeting, OPEC said it had agreed to cut its supply by up to 750,000 barrels per day to between 32.5 and 33 million barrels per day.
While the IEA did not make any predictions on the chances of OPEC following through on its pledge, its report implied that all oil price bets are off should OPEC fail to deliver.
– Demand growth stalls –
With record OPEC production outweighing some output declines, notably in the US, “the net result is a massive oil inventory that is keeping the market under pressure”, it said.
Stagnating global oil demand growth is not helping the oil price, either.
The IEA on Tuesday cut its forecast for 2016 demand growth to 1.2 million barrels per day from the 1.3 mb/d it predicted last month, and forecast the same increase for next year as many economies slow down.
Economic growth is “vanishing” in the OECD area of developed countries, and decelerating in China, the IEA said.
Indian oil demand growth had, however, “returned with a vengeance”, helped by road transport projects, while demand in Russia showed a “surprising uptick” despite an ongoing recession there.
In a further sign that a re-balancing of the oil market may be underway, the IEA noted that the pace of global oil stock build-ups has been slowing. In the OECD area, commercial inventories even fell in August, for the first time since March, as stocks dropped in the US, Japan and South Korea.
Early indications are that the drawdown trend continued into September, the IEA said.