Global Oil Supply Surplus To Shrink Dramatically - IEA

| About: The United (USO)

Summary

IEA projects market tightening in second half of 2016.

Their underlying data suggests a deficit.

EIA and OPEC data suggests continuing - but smaller - supply surpluses.

Futures markets will rise in advance of tightening.

Though I think the supply figures will be higher than the agencies.

In the International Energy Agency's (IEA) latest monthly report, it provided a relatively positive spin on the future oil supply-demand balance and prices. The IEA had been quite bearish about oil price prospects for a prolonged period of time, so this about-face is particularly noteworthy:

In this Report we note that OECD stocks grew in 1Q16 at the slowest pace since 4Q14 and in February they declined for the first time in a year. This lends support to our view that the global supply surplus of oil will shrink dramatically later this year."

The IEA provided a graphical view of how it expects supply and demand to nearly balance by the end of 2016 (see below). The underlying assumptions for OPEC crude production (including recently-readmitted, net-oil-importer, Indonesia) calls for OPEC output to rise from 32.6 million barrels per day (mmbd) in the 1Q16 to 33.0 in 2Q16, 33.2 in 3Q16 and then slipping back to 33.1 in 4Q16.

Source: International Energy Agency (IEA).

This trajectory of OPEC production, combined with a 0.7 mmbd drop in non-OPEC supply and a 1.2 mmbd gain in total demand in 2016, would cause stock draws of 0.3 mmbd in 3Q16 and 0.44 mmbd in 4Q16, based on IEA's spreadsheet. Oddly, their graph (above) shows slight builds each quarter through 2016.

International Energy Agency

Million Barrels Per Day

1Q16

2Q16

3Q16

4Q16

Total Demand

94.8

95.2

96.6

96.8

OPEC Crude

32.6

33.0

33.2

33.1

Total Supply

96.4

96.4

96.4

96.4

Balance

1.5

1.1

-0.3

-0.4

Click to enlarge

Toward the end of last month, IEA director Faith Birol had said:

At the turn of this year or latest 2017, we expect oil markets to rebalance and the prices to rebalance. When we look at all the fundamentals - demand, supply and stocks - I have all the reasons to believe that in the absence of a major economic downturn we are going to see balance in the markets latest by 2017."

EIA And OPEC Estimates

But relatively small changes in supply or demand could easily flip the balance. For example, in the latest Energy Information Administration (EIA) projections, released this week, show world supply exceeding demand for the balance of 2016.

Energy Information Administration

Million Barrels Per Day

1Q16

2Q16

3Q16

4Q16

Total Demand

94.2

95.0

95.9

95.9

OPEC Crude

31.6

32.4

32.9

32.9

Total Supply

95.5

96.0

96.7

96.7

Balance

1.3

1.0

0.8

0.8

Click to enlarge

Similarly, I placed the IEA's projections for OPEC crude within the supply-demand table included in OPEC's Monthly Oil Market Report published today. The projections show a large reduction in the supply-demand gap, but still show supply exceeding demand in the second half of the year.

OPEC

Million Barrels Per Day

1Q16

2Q16

3Q16

4Q16

Total Demand

93.1

93.3

95.2

95.2

OPEC Crude

32.3

33.0

33.2

33.1

Total Supply

95.5

95.3

95.5

95.8

Balance

2.4

2.1

0.4

0.6

Click to enlarge

"Fundamentally, oversupply still persists," OPEC wrote. "Oil output remains high." On the other hand, it estimates that the demand for OPEC crude will average 31.5 million barrels per day, well below projected production.

Conclusions

There is more evidence that the market will tighten as 2016 progresses. However, it looks like OPEC will be raising its production, and so a rebalance may not occur this year. I also believe that the U.S. production decline will be smaller than generally expected.

But the futures market anticipates future events and can gain before they manifest. What futures prices will face though is the headwind of producer hedging (sales) which I think will be significant in the $50s.

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.