Oil surplus about 40% smaller than thought a month ago

The global glut of oil is shrinking, and the oil surplus is smaller than it was believed to be a month ago, according to the IEA’s June Oil Market Report.

The oil surplus in the first half of 2016 is 800 MBOPD, about 40% smaller than estimated in May, and growing demand is expected to help bring the market back into balance in 2017, the agency reported. Despite the bullish outlook, the IEA said the “enormous inventory overhang” which built up since the end of 2014 will be enough to limit a significant increase in price.

Global oil supply saw its “first significant drop since early 2013” in May as outages in OPEC and non-OPEC countries removed approximately 800 MBOPD from the market. Wildfires in Canada, along with rebel activity in Nigeria accounted for much of the decline. Total production in May fell to 95.4 MMBOPD, 0.6 MMBOPD less than this time last year.

OPEC crude output fell 110 MBOPD in May to 32.61 MMBOPD as groups in the oil-rich Niger Delta sabotaged oil and gas infrastructure. Production outages in Nigeria more than offset increased output from Middle East countries.

Demand growth stronger than expected at 1.3 MMBOPD for 2016

The IEA revised global demand growth up for the first quarter of the year to 1.6 MMBOPD. The agency expects oil demand to grow 1.3 MMBOPD for the year as a whole, up 100 MBOPD from its May forecast. “The growth rate is slightly above the previous trend, mostly due to relatively low crude oil prices,” the IEA said.

Currently, oil demand is growing faster than supply, but the return of barrels from Canada, Nigeria and Libya all present potential downside for crude oil prices moving forward.

A light at the end of the tunnel in 2017

The IEA expects oil demand to grow by an additional 1.3 MMBOPD in 2017 as the market begins to balance after being thrown into a tailspin at the end of 2014.

Supply and demand for crude oil through the end of 2017

Source: IEA

Production outside of OPEC will grow by a “modest” 200 MBOPD, with gains limited to Canada and Brazil. U.S. shale oil production will start to recover by the middle of next year, but the IEA anticipates that output will be 190 MBOPD lower in 2017 than in this year, after declining 500 MBOPD in 2016 from 2015. Global inventories will decline by 100 MBOPD through the year, the IEA said.

The IEA anticipates that there will be greater demand for OPEC’s crude oil in 2017, with the agency estimating demand for OPEC oil averaging 33.5 MMBOPD next year. The group produced 32.4 MMBOPD in May, according to secondary sources cited in OPEC’s monthly report.

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