The IEA's Mixed Picture

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Daniel Jones

Summary

Recently, the IEA reported that OPEC oil output has been falling, even as Iran pumps more and more oil.

On top of this, the glut is actually not as bad as many have feared and most of the global picture is improving.

However, some data, particularly projected output declines and demand, are not as impressive as one might have otherwise hoped.

This creates a mixed picture for the oil market but one in which the positive indicators cannot be denied.

Last week, the IEA (International Energy Agency) reported their monthly outlook for this year's oil industry. In it, the group posted mixed data, some of which suggested the picture is quickly improving and the other suggesting tougher times ahead. In what follows, I will dig into the data and detail what this means for investors in the United States Oil ETF (NYSEARCA:USO), as well as for those invested in other energy-related ETFs and companies that operate within this space.

A mixed supply picture

According to the IEA, oil supplies for the month of March this year came in at 96.1 million barrels per day. This actually represents a decline of 0.3 million barrels per day compared to what was seen (on an adjusted basis) a month earlier. This move was driven not only by a falloff in domestic output in the U.S. but also by an overall decline in OPEC production as outages in nations like the UAE (United Arab Emirates), Nigeria, and Iraq were large enough to offset rising production in places such as Angola and Iran. It was also noted, in their release, that Saudi Arabia saw a very modest decline in production too but it was far from material in nature. It should be mentioned here that the trend toward lower OPEC production has continued since at least January as you can see in the table below.

Click to enlarge

Thanks to this drop in supplies for March, the supply/demand imbalance is narrowing by a nice margin. Last month, it was forecasted that global oil production for February was 1.7 million barrels per day greater than it was last year. This decline in March output has pushed the annual increase down to just 0.2 million barrels per day. Should the picture continue to improve along the IEA's expectations, non-OPEC oil production this year should be about 0.71 million barrels per day below where it was last year. While this is positive for oil bulls, it is disappointing in a sense because the drop forecasted a month ago was for a decline in global output totaling 0.75 million barrels per day.

To me, these numbers still seem off. Given current trends and assuming that these trends continue, I previously estimated that production for the U.S. alone should see a conservative drop here of at least 0.83 million barrels per day. Under the moderate scenario, I had forecasted production falling this year by nearly 1.01 million barrels per day, while the liberal (and least likely) forecast called for a year-over-year decline of 1.16 million barrels per day. Seeing as how the global oil rig count has dropped, I'd be surprised to see a falloff this year of less than 0.90 million barrels per day outside of OPEC and I believe it's likely that the IEA will eventually revise their numbers to more closely mirror mine by the end of this year.

Demand is still weak but the glut isn't large

Also in its monthly update, the IEA stated that global oil demand growth should come in around 1.2 million barrels per day. Although this seems like a great deal of increased demand, it's actually well below the 1.8 million barrels per day we saw in increased consumption during 2015 and is the lowest level of growth in years. On top of seeing lower demand growth in China (which is to be expected), and Europe (same), the group thinks that oil demand growth in the U.S. will be fairly low. While this is certainly possible, I have a hard time digesting that suggestion because, even though distillate fuel demand has been lower this year compared to last, recent data from the EIA (Energy Information Administration) has placed year-over-year petroleum product demand growth at 3.2% for the past few weeks.

The last noteworthy data I saw relates to the organization's view on OECD inventory levels of crude plus petroleum products. In its report, the IEA stated that OECD inventories stood at 3.06 billion barrels right now. This compares favorably to the EIA's first quarter (for this year) estimate of 3.128 billion barrels, a disparity of 68 million barrels. As a result of this, total OECD stocks stand about 387 million barrels above their average level.

This is most certainly large but even if you conclude that non-OECD nations have seen storage levels rise by this same amount and if you assume that the glut began at the start of the fourth quarter of 2014 when oil prices really started to tank, the excess of supply over demand has been 1.41 million barrels per day. If this is correct (which assumes that a lot of really poor economies plus some large players like China, Russia, and India have added as much to storage as developed nations), then it's still lower than what some organizations have estimated. Truth be told, I would be surprised to see non-OECD nations add as much crude as developed nations have so it's likely the supply/demand imbalance has been further exaggerated.

Takeaway

Based on the data provided by the IEA, it appears as though there are some things investors would be right to be worried about pertaining to the oil market. On the other hand, there are signs that the glut isn't as large as many may have thought and we are moving toward a world where non-OPEC production is destined to fall while OPEC production has been held back due to country-specific regions. Overall, this picture is somewhat mixed for the oil market but I would posit that it leans more to the bullish side than the bearish one, if only because we already knew about weakened demand expectations a while ago.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.