The scenario anticipated for months of steady oil demand growth and falling supply from producers outside the Organization of Petroleum Exporting Countries is now taking shape, and the “oil market looks set to move close to balance in the second half of this year,” the International Energy Agency said in its latest Oil Market Report.
Crude oil prices rallied to a 4-month high in mid-April as further evidence emerged of accelerating declines in US output, while market participants held out hope that upcoming producer talks would agree a deal to help manage a still massive supply overhang.
“We cannot know the outcome but if there is to be a production freeze, rather than a cut, the impact on physical oil supplies will be limited,” IEA said. Currently the agency has made no changes to their previous supply assumptions.
“For now though, the main focus is on the supply side of the balance and our view held since the beginning of 2016 of forecast of a fall in non-OPEC supply in 2016 of 700,000 b/d looks to be spot-on,” IEA said.
Global oil supplied dropped nearly 300,000 b/d in March to 96.1 million b/d, with non-OPEC accounting for two thirds of the decrease, according to IEA estimates. Year-on-year gains shrank to only 200,000 b/d from nearly 1.7 million b/d a month earlier and the 2.7 million b/d average over 2015.
In March, the year-on-year non-OPEC oil production drop was estimated at 690,000 b/d, and there are signs that the much-anticipated slide in production of light, tight oil in the US is gathering pace.
In its latest shale production update, the US Energy Information Administration forecast total US shale production dropped 103,000 b/d in December, 76,000 b/d in January, and 61,000 b/d in February. The EIA’s Drilling Productivity Report meanwhile saw total oil output from the seven most prolific shale plays dropping a combined 320,000 b/d over the January to April period.
In March, maintenance and unscheduled outages curbed supplies in Canada and Ghana. In contrast, Russian production hit yet another high in March, standing nearly 230,000 b/d above year-ago levels.
The outlook for non-OPEC production in 2016 is largely unchanged since last month’s report at 57 million b/d, which is 710,000 b/d less than the 2015 average. Other notable declines are expected from China, Mexico, Colombia, and Kazakhstan, while Russia, Canada, Brazil, and Congo remain amongst the few non-OPEC countries expected to post gains this year.
“Within the group of non-OPEC producers there are few areas of growth with only a handful of countries likely to increase production this year, unless Russia, which has surprised us all with continued growth in production, does not carry out its professed support for a production freeze,” IEA said.
A second month of supply outages in Nigeria, the UAE, and Iraq more than offset a further rise in Iranian production, pushing down overall OPEC output during March to 32.47 million b/d, a decrease of 90,000 b/d month-on-month. Supply from Saudi Arabia, OPEC’s largest producer, dipped in March but held near 10.2 million b/d.
Pipeline sabotage in Nigeria and Iraq and oil field maintenance in the UAE have shut in nearly 600,000 b/d of supply since the start of the year. OPEC production might climb higher during April as oil fields in the UAE come out of maintenance, if Iraq’s northern production recovers from pipeline issues, and if Iran manages to boost crude oil exports that hit 1.6 million b/d during March.
The pace of Iran’s return to the market is more measured than some expected, but Iranian production in March was still nearly 400,000 b/d higher than at the start of the year, in line with IEA’s forecast.
“While nuclear sanctions have been lifted, some financial sanctions remain in place and the financing of Iran’s crude oil trade is not always straightforward. Nor is access to markets, as shown for example by reports of marketing difficulties for Iran’s condensates stocks.” IEA said.
Despite the latest downbeat global economic outlook from the International Monetary Fund, IEA has not made changes to its demand numbers.
“We remained confident that in 2016 global oil demand will grow by 1.2 million b/d. In the meantime, India could be replacing China as the main engine of global demand growth,” IEA said.
Revised data for late 2015 and early data for 2016 shows year-on-year growth of approximately 8%. For 2016 as a whole, India will see growth of around 300,000 b/d, the strongest-ever volume increase. Reforms to the rules allowing refiners to directly import crude oil are all part of a general trend towards liberalization that should underpin India’s growth momentum.
For the time being, based on a conservative scenario for OPEC crude production of 32.8 million b/d in second-quarter 2016 and 33 million b/d in both the third and fourth quarters, IEA’s outlook suggests that after big build-up of stocks in the first half of 2016 of 1.5 million b/d the surplus will fall to 200,000 b/d in both the third and fourth quarters.