The market needs time for the full impact of the big supply cuts under the output reduction agreements to be felt, the International Energy Agency (IEA) said on March 15.
The price of oil has been stuck in a narrow range since the conclusion in mid-December of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC production accords. The thinking was that a floor had been put under prices, at an unspoken level of $50 per barrel, so producers were probably comforted by the fact that Brent crude oil barely moved much below or above $55 per barrel, the IEA said in an analysis posted on its website.
After March 7, the sudden move downwards saw prices return to almost exactly the same level as on November 30 – just below $52 per barrel for Brent – when the OPEC deal was announced, the IEA said, adding that the main trigger for the recent fall was mainly US-centred, caused by yet another build in crude oil stocks reported in preliminary weekly data from the International Energy Agency.
The IEA said that the big backlog of unabsorbed crude oil should not come as a surprise. Prior to the Vienna agreement production from OPEC countries was increasing. Export volumes are still appearing in storage around the world and, as part of this, US stocks are building. The US is seeing a triple surge in supply: rising imports (exports are also growing), rising domestic production and falling refinery utilisation.
It also noted that the implementation of the OPEC production agreement appears in February to have maintained the solid start seen in January. For the first two months of the deal the compliance rate averaged 98%, although the figure is very heavily influenced by Saudi Arabia whose rate was considerably higher at 135%, the IEA said.
“The market needs time for the full impact of the big supply cuts under the output reduction agreements to be felt,” it said. The IEA does not predict OPEC production per se, but if current production levels were maintained to June when the output deal expires, there is an implied market deficit of 0.5 million barrels per day for the first half, assuming, of course, nothing changes elsewhere in supply and demand. For those looking for a re-balancing of the oil market, the message is that they should be patient, and hold their nerve. In the meantime, the volatility that suddenly broke out last week will probably recur, as the IEA has regularly warned.