IEA Projects Oil Market to Re-balance in 2017

“It is very tempting, but also very risky, to declare that we are in a new era of low oil prices”, the Paris-based IEA said in its Medium-Term Oil Market Report for 2016, released early Monday.

“But they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant future”, he added.

The IEA said that global oil supply dropped by 200,000 barrels a day to 96.5 mb/d in January “as higher OPEC output only partly offset lower non-OPEC production”. Compared to an increase of two million bpd in worldwide crude oil inventories in 2015, oil inventories are expected to increase by just 100,000 bpd in the next year. The gradual recovery in prices, coupled with new technology and cost reductions, will allow USA producers once more to add output. By then, oil prices should rebound as supply and demand converge.

David Dismukes, Executive Director at the LSU Center for Energy Studies, says this is disappointing news to the oil industry, after hearing reports about a production freeze in the Middle East. But Dismukes doesn’t see a cutback in production by oil producing countries.

The IEA took note of an agreement this month between Saudi Arabia and Russian Federation, the world’s top crude producers, to stick to current production if others followed suit, but offered no opinion on the likelihood of such a deal gaining traction.

Birol cited the extraordinary volatility in oil markets, which have made forecasts “more hard than ever”, for the changing outlook.

Investment in exploration and production would decline by 17% in 2015, the IEA forecast, following a 24% drop in 2015. On Monday the price was up around 4.9% at $34.62, but still far below a high of $115 in June 2014.

“While oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies-at least in the near term”, the report noted.

Pittsburgh-area gasoline prices decreased by 3 cents in the last week and averaged $1.88 a gallon this morning, as global leaders try to negotiate an oil production freeze to pare back oversupply that has pushed down petroleum prices.

The IEA warns that growth in Canada’s oil sands could come to a complete stand-still. A barrel of benchmark USA oil rose $1.84 to $31.48 a barrel in NY.

The announcement, in OPEC’s closely watched monthly oil report, comes after oil prices resumed their decline after members of the oil-producer group failed to agree on a production cut over the week.

As a result of the increase in demand and weaker growth in supply, OPEC’s share of the total market for crude will reach 33.8 percent in 2020, up from last year’s projection of 32.4 percent.