The IEA downgraded global oil demand growth for this year, dropping its estimate to 1.3 million barrels per day (mb/d). That is the second annual decline in demand growth and also slightly lower than the agency’s estimate of 1.3 mb/d from last month, and it doesn’t bode well for near-term increases in oil prices.
In its April Oil Market Report, the IEA puts the blame on weaker-than-expected demand in the first quarter of this year, which is the result of disappointing figures in India, Russia, the U.S., Korea and the Middle East.
On the plus side, however, OPEC has managed to steadily boost compliance with its pledged production cuts. Output from the cartel fell by 365,000 bpd in March, dropping to 31.68 mb/d. Saudi Arabia cut deeper, taking its production below 10 mb/d. But some of the OPEC declines came from involuntary losses in Libya and Nigeria, two countries that are exempt from the deal anyway.
Still, non-OPEC producers, led by Russia, also made production cuts, boosting compliance to 68 percent. The IEA said that OPEC compliance “has been impressive from the start,” and that “the game has gone fairly well for producers.” Oil prices were steady between December and March, and after a brief selloff, crude has firmed up again in the mid-$50s.
However, despite the OPEC cuts, the massive stockpile overhang continues to act as a major drag on oil prices. The IEA didn’t exactly take the most bullish stance on this, noting that although crude inventories fell a bit in February and probably declined in March as well, the enormous buildup in January (mainly in the U.S.) led to an overall increase in storage in the OECD of about 0.4 mb/d for the first quarter. That puts OECD storage levels at 330 million barrels above the five-year average, a key metric that OPEC is watching as it considers whether or not an extension of its deal is needed. On the other hand, inventories did decline elsewhere, such as in the Caribbean, in South Africa and in floating storage.
Looking forward, the IEA laid out the quandary for OPEC. The effect of a six-month extension of the deal “would be bigger implied stock draws,” but it would also boost prices and lead to a higher production response from U.S. shale and other non-OPEC countries. In fact, the IEA upgraded its forecast for U.S. shale, projecting growth in production on the order of 680,000 bpd this year. Total non-OPEC production will grow by 485,000 bpd this year, a sizable rebound from the 790,000 bpd decline in output last year.
Overall, the IEA said that it “can be argued confidently that the market is already very close to balance,” but that more data is needed for that to be made clear. So, it is a bit of a waiting game now before there can be a case made for higher oil prices.
"We're seeing demand growing fairly steadily in the oil market and we think that the balance is coming together slowly but surely and the numbers are there to support it," Neil Atkinson, the IEA’s head of oil industry and markets, and editor of the agency’s monthly report, told CNBC. "We think that as the year progresses that rebalancing will become more and more apparent in the drawdown of actual physical stocks," he added.
A day before the publication of the IEA report, U.S. government data painted a bit of mixed picture regarding the health of the market. The weekly release from the EIA was arguably better than it has been for much of this year, showing the first significant inventory decline reported this year. Stocks dropped by 2.1 million barrels, sitting just below the all-time record high hit the previous week at 535.5 million barrels. The decline bodes well – more refining runs heading into summer driving season combined with steady, if not impressive, demand growth could start to drain U.S. stocks at a quicker pace.
But the flip side of the U.S. data is more evidence of a strong rebound in shale production. For the week ending on April 7, the EIA estimated that U.S. oil production rose to 9.235 mb/d, a weekly increase of 36,000 bpd. The U.S. is now producing around 700,000 bpd more than the low point last summer. More rigs, an increase in drilling permits, and higher levels of spending will lead to even more production gains.
With the plethora of data points on either side of the ledger, one could stitch together either a bullish or a bearish case for oil, depending on one’s preference or point of view. So we will just have to wait and see. As the IEA said in its report, “[w]e have an interesting second half [of the year] to come.”
By Nick Cunningham of Oilprice.com
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