Oil market could drown in oversupply in 2016, says IEA

International Energy Agency predicts increase in supply after lifting of sanctions against Iran, pushing prices down further

The world could find itself drowning in oil this year and prices could fall further as new Iranian output cancels out production cuts elsewhere, according to the International Energy Agency.

An increase in supply and weakening demand growth will ensure there is an overabundance of oil until late 2016 at the earliest, the IEA said in its January report. It said the result would be the third successive year when supply exceeded demand by 1m barrels a day, and the system would struggle to cope.

The agency, which advises industrialised countries, said growth in global oil demand would be weaker in response to the slowing economy of China, whose manufacturing sector absorbs vast quantities of the world’s oil output. At the same time, as a result of sanctions against Iran being lifted, the IEA estimates 285m barrels will be added to stocks this year.

Production from non-Opec countries will fall by 600,000 barrels a day this year, but Iran’s re-entry to the international market could fill the gap by the middle of 2016, putting further pressure on prices, the IEA said.

“While the pace of stockbuilding eases in the second half of the year as supply from non-Opec producers falls, unless something changes, the oil market could drown in oversupply,” the IEA said.

Brent crude oil dropped to a 13-year low of less than $28 a barrel on Monday after Iran’s liberation from sanctions left it free to return to the export market. Iran’s comeback threatens to increase the oversupply created by US shale drillers and Saudi Arabia’s determination to keep pumping in an attempt to put smaller competitors out of business.

On whether the oil price could fall further this year, the agency said: “The answer to our question is an emphatic yes. It could go lower.”

Warm early-winter temperatures in Europe, Japan and the US and economic gloom in China, Brazil, Russia and other commodity producers caused a sharp reversal in the oil market last year. Demand more than halved from 2.1m barrels a day in the third quarter, near a five-year high, to a year low of 1m barrels a day in the final quarter.

The IEA said: “Markets were routed in December as persistent oversupply, bloated inventories and a slew of negative economic news pressured prices.”

The agency said it had expected demand growth to slow but the pace of the slowdown was a shock. It pointed to falling industrial usage in China, where demand for diesel plummeted in the fourth quarter. As storage space on land becomes scarce, it may become profitable to stockpile excess crude on tankers at sea to accommodate the oil glut, the IEA said.

Markets had been expecting the lifting of sanctions against Iran for months but prices still fell in response because of the generally turbulent backdrop. The IEA questioned whether markets had fully understood the potential impact of the return of Iran, which has the world’s fifth biggest oil reserves.

“There are considerable uncertainties around the quality and quantity of oil that Iran can offer to the market in the short term and the not inconsiderable challenge of finding buyers willing to take more oil into an already glutted market. However, if Iran can move quickly to offer its oil under attractive terms, there may be more pricing in to come,” the IEA said.

For much of last year, the falling oil price was viewed as a benefit for the global economy because it cut costs for most companies and increased consumers’ spending power. But fears have increased about the part played by weakening demand and slowing world growth in falling prices.

Valeriya Vitkova, a researcher at Cass Business School, said: “What has changed recently are concerns on the demand side of the equation, in particular from China and the US. Chinese growth has driven global oil demand in the last decade and any slowing in that growth rate, even if still growing, means the gap between supply and demand is unlikely to close.”

Contributor

Sean Farrell

The GuardianTramp

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