Late last week, the IEA (International Energy Agency) came out with a monthly report regarding the global oil picture. Like the EIA (Energy Information Administration) and OPEC, the organization attempts to utilize its resources to gather the most accurate energy data possible and to use it to provide guidance on what the market looks like now and how it's shaping up to look like in the future. Now, with fresh data out for the month of April, I decided that it would be a wise idea to dig in and see what their thoughts are on the market. Using this, investors should have a better understanding of what the situation may look like for the United States Oil ETF (NYSEARCA:USO), as well as energy-related companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX) and Legacy Reserves (NASDAQ:LGCY), and other energy-related ETFs.
The supply picture worsened a bit
According to the IEA, the global supply picture for oil worsened in the past month. If their estimates are correct, supplies increased by 250 thousand barrels per day to 96.2 million barrels per day compared to where they were in March. It should be mentioned, however, that this is somewhat deceptive when taken at face value because March's release actually stated that supplies were at 96.1 million barrels per day, representing a build of 100 thousand barrels per day. What this implies is that the picture worsened month-over-month but around 150 thousand barrels per day of that worsening came from a downward revision for the prior month.
Regardless of how you stack it though, the supply picture was worse than in March. This was chalked up to a 330 thousand barrel per day increase from OPEC nations (some of which was offset by non-OPEC declines). Iran led the way here, with output from the nation climbing by 300 thousand barrels per day to 3.56 million. This suggests that total output from when they were being hit by sanctions has increased by 760 thousand barrels per day. Iraq and the United Arab Emirates also saw production rise month-over-month, but these builds were mostly offset by outages in Kuwait and Nigeria, while Saudi Arabia's production remained unchanged at 10.2 million barrels per day. Collectively, OPEC output came in at 32.76 million barrels for the month of April.
Although this looks bad, the supply situation isn't getting materially worse and may actually be improving in some respects. Output in the month of April was actually up only 50 thousand barrels per day compared to April of 2015. OECD oil stocks are also showing signs of improvement, with February reporting a modest draw followed up by March's draw of 1.1 million barrels. Unfortunately, some build did take place in April so these were temporary but the overall trend is more bullish than bearish.
Part of this is due to the fact that the IEA now believes that non-OPEC oil supplies this year will drop by 800 thousand barrels per day, led largely by a falloff in shale output in the U.S. This is a nice upward revision compared to the 710 thousand barrel per day drop previously anticipated by the IEA and should serve as a signal that additional declines in output (assuming nothing else changes materially) are likely to be forecasted in the months to come.
Demand is still dreary but I'm expecting improvement
One thing in the IEA's report that disappointed me was the fact that the organization isn't expecting much when it comes to demand. During the first quarter of this year, demand estimated 1.4 million barrels per day above where they were last year. This is respectable in my mind and suggests that the future is looking bright, but the organization thinks that overall demand this year will be just 1.2 million barrels per day above where it was in 2015.
This is a key issue that I disagree on to some extent. Back in March, the EIA thought that global oil demand would increase by just 1.16 million barrels per day, a decrease from where it stood on the issue earlier in the year. However, seeing stronger demand from China and India, they now anticipate this number to rise by 1.43 million barrels per day, followed by an even larger uptick in 2017. Meanwhile, the IEA is only forecasting a demand increase of 1.2 million barrels per day, the same that they estimated in March. It's impossible to know for sure where the demand picture is pointing to but while I am more cautious regarding China than many investors, I'm more inclined to agree with the EIA's build as opposed to the IEA's at this point in time.
Based on the data provided, the IEA saw some worsening of the supply picture during April but the overall supply situation isn't as bad as many investors may fear. With non-OPEC output slated to fall faster than anticipated and demand likely to be higher this year than the IEA has forecasted, I believe future reports by the group will probably be more favorable than this one for oil bulls.
Disclosure: I am/we are long AREX, MEMP.
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.
Additional disclosure: I may end up buying into shares of LGCY or its preferred units at any point in time.