IEA Oil Market Report Sees Bumpy Road to Rebalancing

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In its monthly Oil Market Report for May released Tuesday morning, the International Energy Agency (IEA) said that global crude supplies fell by 144,000 barrels per day in April, primarily due to lower output from Canada. Total output was 96.17 million barrels a day, down 90,000 barrels a day.

Global stockpiles added just 100,000 barrels in April, following a drop of about 1 million barrels in March. Commercial inventories in OECD countries dropped by 32.9 million barrels in April and now total 3.025 billion barrels. Commercial inventories in OECD nations increased by an estimated 38.5 million barrels in the first quarter of 2017 (425,000 barrels a day).

The IEA projection of global demand growth of 1.3 million barrels a day for 2017 was unchanged, but due to rounding, fell by 115,000 barrels a day compared with the March estimate.

OPEC crude oil production rose by 65,000 barrels a day to 31.78 million barrels in March. Increases in production from both Nigeria and Saudi Arabia more than offset decreases from Libya and Iran. The IEA expects non-OPEC output to rise by 400,000 barrels a day in 2017.

Regarding prospects for continued production cuts and higher prices the IEA said:

Looking at 2Q17, if we assume that April’s OPEC crude oil production level of 31.8 [million barrels per day] is maintained, and nothing changes elsewhere in the balance, there is an implied stock draw of 700,000 [barrels per day]. Adopting the same scenario approach for the second half of 2017, the stock draws are likely to be even greater. Even if this turns out to be the case, stocks at the end of 2017 might not have fallen to the five-year average, suggesting that much work remains to be done in the second half of 2017 to drain them further. In addition to production cuts and steady demand growth, a major contribution to falling crude stocks in the next few months will be a ramp-up in global crude oil runs. Starting in March, refinery activity is building up and by July global crude throughputs will have increased by 2.7 [million barrels per day].

Yesterday’s news that Saudi Arabia and Russia will argue in favor of extending the current production cuts through the first quarter of 2018 indicate that drawing stockpiles down to the five-year average has proved to be more difficult than OPEC and its partners anticipated. U.S. shale production is the problem, according to the IEA:

[T]oday the most closely watched data point on the supply side is US crude production. In February, it increased again, this time by nearly 200,000 barrels per day and, at 9.03 [million barrels per day], was the highest since March last year. After bottoming out in September, output has increased by nearly 465,000 barrels per day. In line with stronger recent performance from the US shale sector we have revised upwards our expectation throughout 2017 and we now expect total US crude production to exit the year 790,000 barrels a day higher than at the end of 2016, which is an upward revision of 100,000 barrels a day since last month’s Report.

Early Tuesday morning, West Texas Intermediate crude for June delivery traded at $49.23 a barrel, up about 0.7% compared with Monday’s closing price. Brent crude for July delivery traded up about 0.7% at $52.19 a barrel in London.