Daily Management Review

IEA projects lull in oil prices


The monthly report from the International Energy Agency (IEA) has warned that oil prices may fall further considering the surplus amounts of crude supplies and tightening storage capacity in the US.

The Oil futures fell sharply on 13 March to tally a weekly decline of nearly 10%. Crude-oil for delivery in April fell $2.21, or 4.7%, to settle at $44.84 a barrel on the New York Mercantile Exchange. Prices ended the week with a loss of 9.6%.

The report by IEA also noted that the US may soon run of capacity to store crude oil which would further bring down the price of oil. This downward trend is estimated to last at least until the second half of 2015. After the production of oil in the US starts reducing from the second half of 2015, the oil prices may shoot up.
"Behind the fa├žade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly," the IEA said in its report.

In February, non-OPEC production is estimated to have risen by about 270,000 barrels per day (bpd) on a month-on-month basis to 57.3 million bpd, led by higher output in North America. The large output from domestic rig seems to defy the trend with the IEA noting that the steep drops in the US rig count have been a key driver of the recent price rebound. Meanwhile, the global supply rose by 1.3 million bpd year-on-year to an estimated 94 million bpd in February, led by a 1.4-million-bpd gain for non-OPEC producers.

US crude inventories soared due to output growth and plunging crude refinery throughput, with seasonal and unplanned refinery outages, weak margins and high gasoline stock builds. The US crude stocks were estimated to be at a record 468 million barrels. According to the report, US stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive.

Meanwhile this new report by IEA will act as a disappointment for OPEC which kept its output steady at the group's last meeting in November to protect market share and reduce US oil output growth.
Meanwhile, the IEA raised its demand forecast for the second half of 2015, which considers there would be a higher call on OPEC crude of 30.3 million bpd in the same period. This is estimated to be closer to the group's real production levels and the official target of 30 million bpd.

Having bottomed in the second quarter of 2014, global oil demand growth has since steadily risen, with year-on-year gains estimated at 1.0 million bpd for the first quarter of 2015, the IEA said.

The IEA report also highlights the other factors in the oil prices, including the political instability in certain producing countries such as Iraq and Libya and the upward trend in the refined oil market.