If the global crude oil market needed a boost, it got the best it could ever get from the latest monthly oil report that came out of the International Energy Agency, the global energy think tank. The report, which would no doubt be sweet music to the ears of many oil producing countries groaning under the heavy yoke of low oil prices, says that prices have already bottomed out. This means that the worst case scenario for prices, in which at a point sank below $27 in January, is over.
“For prices there may be light at the end of what has been a long, dark tunnel,” the IEA said.
Expectedly, prices nudged upwards at the good news as Brent crude, the global oil benchmark, rose 1.4 percent to $40.61 a barrel on London’s ICE Futures exchange. Similarly, on the New York Mercantile Exchange, West Texas Intermediate futures rose by 1.9 percent to trade at $38.55 a barrel.
The IEA’s report comes at a time when optimism in the market is moving beyond a flicker of hope for a commodity that is down almost two-thirds from its high of $114 a barrel in 2014.
“It is clear that the current direction of travel is the correct one, although with a long way to go. Without an increase in demand expectations, high-cost oil suppliers will continue to bear the brunt of the market-clearing process,” the IEA said.
Global Oil Output Eases
The IEA report observes that global oil supplies eased by 180, 000 barrels per day in February, to 96.5 million barrels per day (mb/d) as a result of lower OPEC and non-OPEC output.
According to the report, OPEC crude oil production dropped by 90, 000 b/d in February to 32.61 mb/d with losses from Iraq, Nigeria and the United Arab Emirates partly offset by a substantial rise in flows from post-sanctions Iran.
“We have seen supply disruptions in Iraq, Nigeria and UAE. Production from these countries fell in February by 350,000 barrels a day. Meanwhile, Iran’s return to the market has been less dramatic than the Iranians said it would be; in February we believe that production increased by 220,000 b/d and, provisionally, it appears that Iran’s return will be gradual,” the IEA said.
Similarly, non-OPEC production also slipped by 90,000 barrels a day in February to 57.1 million barrels per day, and are expected to fall by 750,000 barrels a day this year, the IEA said. Total U.S. oil output is forecast to decline by nearly 530,000 barrels per day this year, to 12.4 million barrels a day.
Non-OPEC producers such as those in the U.S. and Canada, who have far higher production costs than OPEC producers mitigated lower oil prices by cutting production and exploration. Such moves have had a knock-on effect on lowering non-OPEC oil supply. “There are clear signs that market forces … are working their magic and higher-cost producers are cutting output,” the IEA said.
Supply Still More than Demand
Despite the ease in oil production, the IEA report, however, observes that output was still 1.8mb/d above the level it was a year ago. Experts insist that there is still a glut of about a million barrels per day, down from about 2 million b/d a year ago. The IEA, however, believes that demand and supply should balance in 2017.
The body left its demand growth forecast for 2016 unchanged at 1.2m b/d, driven by India and smaller Asian economies. China which was the pillar for global oil demand for the last decade will see growth of 330,000 b/d this year. This compares to an average of 440, 000 b/d for the last 10 years. “We expect India and other smaller non-OECD Asian economies and the Middle East to provide most of the 2016 growth. The foundations for global demand growth are sound, but not rock-solid,” the IEA said.
The IEA cautioned that any further rises in oil prices could dampen demand growth. “The foundations for global demand growth are sound, but not rock-solid,” the IEA warned.
Respite for African Oil Producing Countries
This January, Africa’s top five oil producing countries led by Nigeria, faced the possibility of botched budget as oil prices in some cases fell 30 percent below the budget benchmark. It would have led to massive indebtedness for the countries to maintain their budget if prices had continued falling below $27. But with prices rising to $40, this is above the benchmark of many of the major oil producing African countries. Nigeria for instance has an oil benchmark price of $38 per barrel, Algeria has $37 while Angola has $45 per barrel.