IEA cuts estimate of oil oversupply, sees market balance in 2017

PARIS (Bloomberg) -- The global oil market will be almost balanced next year as demand continues to rise faster than production, while the current oversupply is much smaller than previously thought, the International Energy Agency said.

The surplus in the first half of this year is about 40% smaller than estimated a month ago, as consumption proves stronger than expected while disruptions reduce supply, the Paris-based agency said. Still, the “enormous inventory overhang” that accumulated during years of oversupply will limit any significant increase in prices, it said.

“At halfway in 2016 the oil market looks to be balancing,” said the agency, which advises 29 nations on energy policy. “Less oil has been stockpiled than we originally expected” as “oil demand growth has been significantly stronger” and “unexpected supply cuts” strained the availability of crude.

Oil prices in New York have surged about 80% from a 12-year low in February to trade near $48/bbl as production retreats amid investment cuts, wildfires disrupt operations in Canada and militant attacks hit exports from Nigeria. Prices tumbled last year as OPEC refused to concede market share to a crude surplus triggered by years of booming shale oil output from the U.S.

Supplies outpaced consumption by 800,000 bopd in the first half of this year, the agency said, having estimated that difference at 1.3 MMbopd in last month’s report. The rebalancing of the market may be delayed if halted supplies in Canada, Nigeria and Libya are able to restart, the IEA said.

2017 Outlook

In its first published estimates for supply and demand for 2017, the IEA estimated that global oil demand will increase by 1.3 MMbpd next year, the same rate as this year, to reach 97.4 MMbpd.

Production outside the Organization of Petroleum Exporting Countries will grow by a “modest” 200,000 bopd, with gains limited to Canada and Brazil. While U.S. shale oil production will start to recover by the middle of next year, average output for 2017 will be 190,000 bpd lower, after falling 500,000 bpd in 2016. Global inventories will decline by 100,000 bopd through the year, the IEA said.

As growth in demand exceeds non-OPEC supply, more crude will be required from OPEC. The organization will need to provide an average of 33.5 MMbopd next year, about 900,000 bopd more than the 32.6 MMbopd its 13 members pumped in May, according to the report. Iran, now the fastest-growing OPEC member as it restores exports curbed by international sanctions, may boost output by 100,000 bopd next year to 3.7 MMbopd.

For 2016, the agency raised forecasts for global oil demand by 100,000 bpd on stronger U.S. fuel use, and cut projections for non-OPEC supply by the same amount. Global oil supplies suffered their first “significant” contraction last month since 2013, falling 590,000 bpd from a year earlier as a result of spending curbs and unplanned outages.