IEA says worst may be over for oil price

Recent sharp gains in the oil price, taking it to around $40 per barrel now from $28.50 in mid-January, do not necessarily mean that the worst is over, the IEA said in its monthly oil market report.

“Even so, there are signs that prices might have bottomed out,” it said.

Oil had seen a dramatic fall since trading above $110 in mid-2014 to lows seen in January of this year, before staging a modest recovery to current levels.

But there is a long way to go before supply and demand find a real balance, probably in 2017, the IEA said.

“For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance,” it said.

Among factors for higher prices are talks among producers launched by Saudi Arabia, Venezuela, Qatar and Russia to freeze production which the IEA said amounts to “a first stab at co-ordinated action that is intended to stabilise prices” with the presumed aim of pushing oil up to $50 a barrel.

The outcome of negotiations is, however, uncertain and a big supply overhang in the oil market means it would have little impact in the months ahead.

“Later this month some oil producers are expected to meet to discuss a possible output freeze. We cannot know what this might be and in any event it is rather unlikely that an agreement will affect the supply/demand balance substantially in the first half of 2016,” the report said.

– ‘Market forces working their magic’ –

Among other factors keeping a lid on oil supply, Iran’s return to the market following the lifting of Western sanctions in January has been “less dramatic than the Iranians said it would be”, the IEA said.

“Provisionally, it appears that Iran’s return will be gradual,” said the 29-nation agency that provides analysis on global energy markets.

The IEA said supply disruptions in Iraq, Nigeria and the United Arab Emirates, steady demand for oil and recent weakness of the dollar were other reasons supporting expectations of a price upturn.

Also, there are signs that high-cost producers, including of US shale oil, are lowering output as they can’t cover their costs because of oil price weakness.

Consequently, the IEA has lowered its output target for the US, Brazil and Colombia.

“There are clear signs that market forces — ahead of any production restraint initiative – are working their magic and higher cost producers are cutting output,” it said.

Global demand for oil is expected to grow by 1.2 million barrels per day (mb/d) this year, unchanged from the IEA’s previous estimate.

But the agency said that risks are on the downside, with demand in the US expected to be flat and in China below that seen in recent years.

Most oil demand growth this year will come from India, smaller Asian countries and the Middle East, the IEA said.