Is Oil About to Stabilize?

on April 18, 2017 at 1:05 AM

LIBYA-ENERGY-OILThe International Energy Agency (IEA) has released a statement that they believe the oil market is soon approaching equilibrium, mostly due to the success of the OPEC production deal.

The agency’s data shows that demand is growing at a constant and regular pace in the oil market. “The numbers are there to support it,” according to Neil Atkinson, following the publication of IEA’s monthly oil report.

As actual, physical oil reserves are drawn down throughout the remainder of the year, the evidence of rebalancing will become more apparent, says the agency.

However, according to the IEA’s own monthly report, global demand for oil is poised to fall – for the second year in a row. Muted gains (particularly from Russia and India) have contributed heavily to this slowdown. The agency’s forecast for global demand is currently at 1.3 million barrels per day, which comes after a surprisingly low appetite for oil from investors during the first quarter of the year.

The oil producers themselves have been doing well, ever since the allegiance between OPEC and non-OPEC countries to restrict global supply back in December 2016 – a move aimed at supporting higher prices that have proven successful for the participants.

In January, the overwhelming supply glut lead OPEC to cut output again by approximately 1.2 million barrels per day back in January. This agreement is to last for six months. Eleven non-OPEC countries are involved in the deal, including Russia. The projections from the IEA predict that the oil market will tighten throughout the year as non-OPEC production (including but not limited to the United States) grows further.

The IEA has commented on the state of the supply cuts, despite being only at a half-way point of the deal’s full life. According to the agency, a hypothetical consequence of extending the deal and restricting supply further would be larger stockpiles and stock draws.

This would create additional support for higher prices. In turn, U.S. shale producers would become more profitable due to the higher price point, which encourages growth in that sector – both for shale in the United State and other oil producers.

In March 2017, oil prices fell by about 10 percent, mostly as a result of unplanned outages and political tension in the region – the Middle East has been of particular concern as of late. The IEA, however, insists that prices have stabilized since then. This is in spite of recent developments of U.S. involvement in Syria.

OPEC countries, according to the IEA report, have had impressive levels of compliance with the deal to cut production output. Non-OPEC countries participating in the deal have had increasing compliance rates, but the data from those countries is harder to verify, according to analysts.

As it stands, the U.S. has been quick to fill the gap left by the OPEC cuts, which has capped any substantial price growth that the oil conglomerate would have liked to see. And the industry seems to be growing. After 12 months of successive job loss, February 2017 marked the first month in which there was a net positive job report in the oil and gas industry. So perhaps the U.S. will continue to pick up the slack.

Regardless, the future of the oil market rests in the hands of OPEC, and its decision on whether or not to continue their cuts.