Growing oil stocks and record Middle East output threaten price recovery
A return to dominance for Middle East producers and growing lakes of oil held in storage are threatening the return to price stability and the rebalancing of the market, according to the International Energy Agency.
In its monthly Oil Market Report, the Paris-based energy advisor to the OECD noted risks were starting to build to its forecast that the market would reach a supply and demand equilibrium later this year.
“The existence of very high oil stocks is a threat to the recent stability of oil prices,” the IEA said.
The build up in inventory has been fuelled by a surge in refinery production, which is now running 60 per cent higher than demand for the refined product.
The IEA also found that, after a series of upward revisions to global demand, momentum was now easing.
“Although stocks are close to topping out, they are at such elevated levels, especially for products for which demand growth is slackening, that they remain a major dampener on oil prices,” the IEA warned.
Unless demand turns out to be stronger than we currently anticipate, product stocks could rise still further and threaten the whole price structure.
This view was backed by the release of the latest inventory data from the US Government’s Energy Information Administration that reported gasoline supplies rising 1.2 million barrels for the week compared to market forecast for a 1 million barrel decline.
The impact of the two reports drove prices down by around 4 per cent, with the key global benchmark Brent crude futures trading at $US46.42 a barrel this morning.
Middle East production reaches record levels
The IEA also found that Middle East producers were succeeding in pushing out non-OPEC production, hitting US shale oil particularly hard.
Middle East oil output rose to a record high in June, with production above 31 million barrels a day (mb/d) for the third consecutive month.
At the same time US crude production fell 220,000 barrels a day in June, the largest monthly decline since 2008.
“As such, the Middle East’s market share of global oil supplies rose to 35 per cent, the highest since the late 1970s and an eloquent reminder that even when US shale production does resume its growth, older producers will remain essential for oil markets,” the IEA noted.
The IEA forecast non-OPEC production remains on course to fall by 0.9 mb/d this year before staging a modest recovery in 2017.
Iran continued its rapid return to the market since trade sanctions were lifted, with production up by 750,000 b/d since the start of the year, while conditions in strife-torn and cash-strapped Venezuela continue to deteriorate with production falling another 240,000 barrels a day in June.