IEA: Oil glut could still grow in second half of 2016

(Andrew Burton/Getty Images)
(Andrew Burton/Getty Images)

HOUSTON — Market optimism underpinning oil prices this month is probably wrong, the International Energy Agency said Tuesday, as its view of the global oversupply of crude worsened.

Even if OPEC kept oil production flat, worldwide crude inventories could climb by 2 million barrels a day in the first quarter and keep increasing by 300,000 barrels a day in the second half of this year, the Paris-based group predicted in its monthly oil-market report.

“With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term,” the IEA said. The IEA advises oil-importing nations.

Commercial stocks in OECD countries increased by 7.6 million barrels in December, rising to 3.01 billion barrels — about 350 million barrels above average.

The 13-member Organization of Petroleum Exporting Countries raised daily output by 280,000 barrels in January as Saudi Arabia, Iran and Iraq bolstered production. The group’s total output was 32.63 million barrels a day. The increase was offset by a decline of a half-million barrels a day outside of OPEC.

Daily global demand growth fell from 2.15 million barrels in the third quarter to 800,000 barrels in the fourth quarter, though the group maintained its growth forecast of 1.2 million barrels in 2016. It also hasn’t changed its view that non-OPEC production will drop by 600,000 barrels this year, led by sharp declines in U.S. shale production.

But the IEA dismissed several popular reasons some investors are betting on a swift oil-price recovery, including speculation OPEC will coordinate a production cut with outside exporters. Chances of that, the IEA said, remain low.

While markets expect more crude to flow from Iran this year, the IEA warned traders could be underestimating the rest of OPEC’s ability to raise production this year. The IEA noted that Iraq boosted production to a new record of 4.35 million barrels a day in January and that Saudi Arabia appeared to increase crude shipments.

Markets are also expecting a boost in oil demand growth as crude prices fall to $30 a barrel, but the IEA “so far sees no evidence of a need to revise (its growth forecast) upwards.” Recent projections by the International Monetary Fund say the global economy could grow 3.4 percent this year and 3.6 percent next year, but that “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,” the IEA said.

The group also said the dollar will likely remain stronger than the market expects and non-OPEC production could be more resilient than anticipated.

“There is a lingering feeling that the big fall-off in production from U.S. shale producers is taking an awful long time to happen,” the IEA said.

In early trading Tuesday, U.S. oil dipped 5 cents to $29.64 a barrel on the New York Mercantile Exchange, while global benchmark Brent declined 2 cents to $32.86 a barrel on the ICE Futures Europe.