IEA Highlights Deepening Oil Glut

Market Trends - 10/02/2016

In contrast with earlier projections and speculation from the International Energy Agency (IEA), the prevailing oversupply conditions are set to persist during most of 2016 despite expectations that the imbalance would force marginal producers to cut output, eventually solving the imbalance.  However, with American production levels not declining as fast as predicted and no strong consensus among members belonging to the Organization of Petroleum Exporting Countries to pare back output to previously established quota levels, there is no end in sight for low prices.

Tuesday’s announcement by the IEA sent oil futures tumbling after rallying the prior week following reports of Turkish troop buildups on the northern Syrian border and Saudi Arabia’s offering to put boots on the ground to fight the Islamic State.  According to the report, supply is anticipated to outstrip demand by 1.75 million barrels per day for the first half of 2016, above previous estimates of 1.50 million barrels before inventories begin drawing down in the second half of the year.

Even now, estimates of a second half rebound in oil prices are potentially unwarranted considering the evolving fundamental conditions.  Aside from demand growth expected to decelerate, further supply continues to grow.  Since the lifting of sanctions last month, Iranian output has experienced a massive uptick while Iraqi production has also improved, rising to a record high in January.

Adding to a worrisome outlook is inventory levels which continue to climb.  Although still an early indication, the API weekly crude stock data showed stockpiles rising by an additional 2.40 million barrels last week, highlighting the ongoing imbalance.  EIA data due later this session is expected to corroborate the thesis of rising inventories. However, several factors could reverse recent declines in oil prices, namely the Saudi’s forging ahead with their plans to send special forces troops to Syria and any willingness on the part of OPEC members to contemplate production cuts, despite the inherent unlikelihood.  Moreover, another strong inventory build could very well send prices tumbling to new multi-year lows.


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