'Enormous' inventories to keep lid on oil price

A huge overhang in oil stocks lingering across the world will keep a cap on any further oil price rises, the IEA said Tuesday, even as supply and demand move towards balance by the end of the year.

Global demand for oil is steadily rising thanks to solid economic growth, and supply has been curbed by unexpected production cuts due to wildfires in Canada and rebel attacks in Nigeria, as well as falling US shale production, the International Energy Agency said in its monthly oil market report.

These factors recently pushed the oil price above the key level of $50 as supply came closer to matching demand, a process known as rebalancing which the IEA expects to be fully in place in the second half of this year.

But while market forces play out to help the oil price to continue climbing from its low point of close to $25 at the start of the year, there are still large oil inventories waiting to feed into the market, causing a supply glut that is likely to keep a lid on gains for some time.

"There is an enormous inventory overhang to clear," the IEA said. "This is likely to dampen prospects of a significant increase in oil prices."

Worries about big stocks have caused the oil price to fall back from this year's high of around $51 reached early last month, the agency said, echoing Monday's report from the OPEC oil cartel which said that "speculators became somewhat less interested in long positions" because of the overhang in inventories.

- Many moving parts -

The benchmark Brent crude contract lost ground Tuesday, slipping to $49.83 in late afternoon European business while US's WTI contract eased to $48.46.

"Oil prices are due a short-term breather given the recent run up, as the market takes stock of broader macroeconomic developments," analysts at Energy Aspects said.

The IEA said there is a "huge number of moving parts" in the current oil market environment, making accurate predictions hazardous.

On the supply side, these involve a surprisingly strong return of Iran to the oil market after Western countries lifted sanctions which had been imposed over Tehran's nuclear programme, and questions over the timing of any full resumption of production in Nigeria once Niger Delta security issues are resolved.

Iran has emerged as "OPEC's fastest source of supply growth this year", pumping oil at its highest level in five years, the IEA said.

OPEC, meanwhile, has done little to correct the market's imbalance, failing earlier this month to agree on any production ceiling at a key meeting and deciding instead to keep oil gushing as the moderate recovery in the oil price eased pressure to limit output.

Kingpin Saudi Arabia said at the time that the cartel was "very satisfied" with the market.

This stance had at least "provided some clarity to the market", the IEA observed in its report.

- 'Mixed messages' -

On the demand side, the IEA said relatively weak oil prices will bring more buyers into the market, leading the agency to raise its forecast for 2016 demand growth to 1.3 million barrels per day (mb/d) from a previous 1.2 mb/d estimate.

Countries outside the OECD club of highly-developed nations will provide the bulk of fresh demand, with India the world's growth leader, the IEA said.

Korea and China are also projected to see strong demand.

Following weakness since late last year, demand in the United States has picked up in recent months and will make a "vigorous" contribution to demand growth, it said.

Worldwide oil demand is likely to continue to grow by 1.3 mb/d into next year, the IEA said, in its first estimate for 2017.

"The IEA report has provided mixed messages in the market today," said Dorian Lucus, energy analyst at Inenco.

While flagging an expected increase in demand, "the report has also warned of potential lower prices should current offline capacity in both Nigeria and Canada return," he said.

The 29-nation IEA, based in Paris, provides analysis on global energy markets.

Source: AFP