Supply and demand beginning to cool as oversupply shrinks – IEA, OPEC weigh in

The International Energy Agency sees supply and demand coming into balance during the third quarter of the year, according to its August Oil Market Report.

From July through September, demand will outpace the supply of crude oil by almost 1 MMBOPD, even as OPEC producers continue to increase output.

“Our balances show essentially no oversupply during the second half of the year,” the IEA said in its report Thursday.

While the agency sees supply and demand beginning to balance in the third quarter, the IEA believes both will weaken through the remainder of this year and next. In its August release, the IEA reported oil demand growth will slow from 1.4 MMBOPD in 2016 to 1.2 MMBOPD next year, “as underlying support from low oil prices wanes.”

While the agency’s 2017 demand outlook is still above average, the IEA did lower it by 0.1 MMBOPD from its previous report.

On the supply side, the international agency reported output rose 0.8 MMBOPD in July from both OPEC and non-OPEC sources. Output was 0.2 MMBOPD lower than this time last year, as declines from non-OPEC offset a 0.8 MMBOPD annual gain in total OPEC liquids. The IEA expects non-OPEC production to drop by 0.9 MMBOPD this year before rebounding by 0.3 MMBOPD in 2017.

Saudi Arabia’s oil production hits all-time high

OPEC production continued to grow in July, according to the group’s monthly report, led largely by Iraq and Saudi Arabia. Iraq added the most to its production month-over-month, increasing output 74.8 MBOPD, but OPEC’s largest producer, Saudi Arabia, hit an all-time high. According to secondary sources cited in the OPEC report, the kingdom pumped 10.48 MMBOPD in July, 30.1 MBOPD more than last month.

While OPEC’s own report pegged its monthly production at 33.1 MMBOPD for the month of July, the IEA’s report put the group’s production in July 300 MBOPD higher at 33.4 MMBOPD.

Saudi Arabia ready to support prices

While the news that supply and demand will soon reach a balance is certainly welcome in an industry that has been beset by a glut since late 2014, oil prices reacted more strongly today to Saudi’s Energy Minister Khalid al-Falih saying the kingdom is ready to take action and support the oil market.

Both international benchmark Brent crude and U.S. WTI were up over 4% today as Falih said Saudi Arabia would discuss with other producers next month if more action was necessary to help the oil market.

There could be more downward pressure for oil prices ahead, however, as the summer driving season comes to an end and fuel inventories remain high, OPEC warned.

There are “lingering concerns” that U.S. and European refiners may reduce rates as profits fade amid a continuing overhang of crude and refined fuels, OPEC said in its monthly report.

“With the end of the driving season in the third quarter, gasoline demand could see a seasonal downward correction,” the organization’s Vienna-based research department said. High inventories of heating oil and diesel fuel around the world mean “the supply side could also continue exerting pressure,” it said.

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