IEA for the first time sees light at the end of oil’s ‘long, dark tunnel’

Oil prices may have passed their lowest point as shrinking supplies outside OPEC and disruptions inside the group erode the global surplus, the International Energy Agency said.

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Production away from Organization of Petroleum Exporting Countries will decline by 750,000 barrels a day this year, or 150,000 barrels a day more than estimated recently, the company said. Financial markets are also being supported by output losses in Iraq and Nigeria, so that as Iran restores production slower than planned following the end of international sanctions, it said.

“You will find signs that prices may have bottomed out,” the Paris-based adviser to 29 countries said in its monthly market set of Friday. “For prices there might be light after what has been an extended, dark tunnel” as market forces are “working their magic and higher-cost producers are cutting output.”

Oil prices have recovered Half from the 12-year lows reached in January as U.S. shale production retreats and as some OPEC members led by Saudi Arabia reached a tentative accord with Russia to keep output at current levels. This “freeze” deal, while currently supporting prices, is unlikely to possess a substantial effect on markets within the first half of the year, the IEA said.

Shifting View

The agency’s take on prices is really a shift from last month’s report, that said that crude could sink further because the market remained “awash in oil.” Brent futures traded at about $40 a barrel in London on Friday.

The outlook for that balance of supply against demand in the first half is “essentially unchanged” from last month, the IEA said. World oil consumption will increase by 1.Two million barrels a day, helping to reduce the global surplus from 1.7 million barrels a day in the first half to 200,000 a day within the last 6 months of the year. Recently it projected the second-half surplus could be 300,000 each day. The company repeated that it could lower the demand estimate because the price recovery curbs U.S. appetite for gasoline.

Inventories in the developed world contracted recently for the first time in a year from the “comfortable” levels recorded in January, according to the report.

Iran Return

The return of Iran after January’s nuclear agreement lifted sanctions on its oil trade “has been less dramatic than the Iranians said it would be” and further recovery will be “gradual,” the company said. While the OPEC member vowed to restore 500,000 barrels a day as soon as sanctions ended, it instead boosted output by 220,000 barrels a day in February to 3.22 million, the highest in four years.

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Production from OPEC’s 13 members slipped by 90,000 barrels each day to 32.61 million each day in February as the increases in Iran were countered by declines in Iraq, Nigeria and also the United Arab Emirates. OPEC continues to be pumping 700,000 barrels a day more than the average amount required from the group this year, the IEA’s data shows.

About 600,000 barrels of Iraq’s exports happen to be halted by the closure of their northern export pipeline, while the suspension of Nigeria’s shipments of the Forcados grade – amounting to 250,000 barrels a day – “may be in position for some time.”

U.S. oil production will decline by 530,000 barrels each day this year as the price rout got its toll on investment and drilling, the IEA said. The company also lowered its supply outlook for Brazil and Colombia.

“Without an rise in demand expectations expensive oil suppliers will continue to deal with the brunt from the market-clearing process,” the company said. “It’s clear the current direction of travel may be the best one, however with a long way to visit.”
Bloomberg.com