Production overhang beginning to slow, but “sustainable price recovery more likely a 2017 event”: Wells Fargo
Oil prices continued their gains today as a report from the IEA indicated that prices may have finally bottomed out, and are beginning to recover. In the agency’s March Oil Market Report (OMR), the IEA noted that oil supplies decreased by 180 MBOPD in February to 96.5 MMBOPD, as production from both OPEC and non-OPEC sources declined.
Production remains 1.8 MMBOPD higher than a year ago, however, as gains from OPEC over the last year more than offset the decline in other oil producing regions of the world. Non-OPEC production is estimated to fall by 750 MBOPED to 57 MMBOPD in 2016, 100 MBOPD more than in the IEA’s previous OMR. OPEC production fell by 90 MBOPD in February due to lower volumes from Iraq, Nigeria and the UAE, partially offset by increases from Iran. Saudi Arabia’s production remained flat.
The IEA expects that oil demand growth will remain relatively weak for now at 1.2 MMBOPD. Weakness in demand for middle distillates in the U.S. will offset stronger gasoline demand, while demand in China will grow at 330 MBOPD, below the ten-year average growth rate of 440 MBOPD.
This slow demand growth will leave the supply surplus at 1.9 MMBOPD in the first quarter and 1.5 MMBOPD in the second quarter, but the gap between supply and demand is expected to narrow to 0.2 MMBOPD in both the third and fourth quarters of the year.
A note from Roger Read at Wells Fargo agreed, saying that a substantial price recovery likely will not come before 2017.
First OECD stock draw in a year
Slowing production is beginning to have an effect in the markets, even if supply and demand are not expected to come in line with each other until next year. The IEA’s preliminary data suggests that February was the first time in a year when OECD commercial inventories saw a draw. Data for January showed a build of 20.2 MMBO while crude volumes in floating storage continued to increase.
“Based on project startups later this year and early next, our model predicts modest inventory builds again in early 2017,” said Read. “Thus a more robust and sustainable oil price recovery is more likely a 2017 event.”
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