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3 Big Reasons Why Price Recovery Isn't Coming Soon, IEA Says

HOUSTON – The International Energy Agency said in its monthly report that there are several reasons why a recovery in oil prices is highly unlikely in the short-term. Over the last few weeks, oil prices have remained volatile as rumors came and went regarding an OPEC/non-OPEC meeting, various assessments were proffered on the volume and speed with which Iran can reenter the market, and estimates of a potential boost in demand due to sub-$30/bbl prices were discussed.

On Tuesday, the agency addressed these three "drivers of bullishness" that are being clawed by the "bear."

  • Recent chatter about a meeting of OPEC and non-OPEC producers is mere talk, as the Saudi-led group continues to increase production in pursuit of market share. "Persistent speculation about a deal between OPEC and leading non-OPEC producers to cut output appears to be just that: speculation. It is OPEC’s business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low. This removes one driver of bullishness," the IEA said.
  • The agency addresses another "widely-held view": namely, that OPEC production, other than Iran, will not grow as strongly this year as it did in 2015. "Although it is still early in the year, Iraqi output in January reached a new record and it is possible that more increases could follow. Iran has ramped up production in preparation for its emergence from nuclear sanctions and preliminary data suggests that Saudi Arabia’s shipments have increased. Thus, another driver might be removed."
  • Another view the IEA takes on is that oil demand growth will receive a boost from the plunge of oil prices below $30/bbl. "We retain our view that global oil demand growth will ease back considerably in 2016 to 1.2 mb/d – at 1.2% still a very respectable rate – but our analysis so far sees no evidence of a need to revise it upwards. Estimates by the International Monetary Fund that global GDP growth in 2016 will be 3.4% followed by 3.6% in 2017 is heavily caveated with risks to growth in Brazil, Russia and of course slower growth in China. Economic headwinds suggest that any change will likely be downwards."
  • US, Europe, China To Lead Demand Pulldown

    The IEA has maintained its view that global oil demand will ease back "considerably" this year- to 1.2 M/bpd from a five-year high of 1.6 M/bpd in 2015. Thus, the agency forecasts continuing volatility in oil prices in the short-term, as weakened demand combines with "higher OPEC output" which will "only partly offset lower non-OPEC production."

    Demand is forecast to be pulled down by "notable slowdowns in Europe, China and the United States," and "early elements of the projected slowdown surfaced in the last quarter of 2015."

    This demand outlook is juxtaposed to that of OPEC, which in its most recent monthly report forecast that world oil demand would increase this year and that this would be joined by a fall in supply from non-OPEC producers. This would facilitate the rebalancing of supply and demand and, hence, lift prices, according to OPEC. "In 2016, oil demand growth is expected to be around 1.26 mb/d, marginally higher than in the previous report, to average 94.17 mb/d," OPEC said in its January report.

    More OPEC Production, Less Non-OPEC Production

    Like OPEC, however, the IEA forecasts a decline in non-OPEC supply this year. "Non-OPEC supplies slipped 0.5 mb/d from a month earlier to stand close to levels of a year ago. For 2016 as a whole, non-OPEC output is expected to decline by 0.6 mb/d, to 57.1 mb/d," the IEA said.

    Global oil supply declined 0.2 M/bpd to 96.5 M/bpd in January, as higher OPEC output only partly offset lower non-OPEC production, the IEA said.

    OPEC's oil production rose by 280,000 bpd in January to 32.63 M/bpd as the group continued to produce without a quota. The bulk of this increase occurred "as Saudi Arabia, Iraq and a sanctions-free Iran all turned up the taps. Supplies from the group during January stood nearly 1.7 mb/d higher year-on-year." 

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