Oil market fundamentals could ease over next five years


Oil market fundamentals could ease over the next five years, according to the International Energy Agency, which revised down its demand forecasts through 2016 and revised up its supply projections after 2013 on Tuesday,

“Our preliminary medium-term update suggests a more comfortable market outlook than looked likely six months ago,” the IEA said in its monthly Oil Market Report.

Global demand is now seen rising from 88.3 million barrels per day (mb/d) last year to 95.0 mb/d by 2016, giving average annual growth of 1.1 mb/d. Stronger global liquids supply could boost upstream capacity to 101.5 mb/d by 2016, for average yearly growth of 1.3 mb/d, thanks to rosier prospects for Iraq, Libya and the Americas.

The average “call” on OPEC supply and/or stocks is seen increasing from 30.53 mb/d this year (revised down by 100 kb/d) to 31.64 mb/d in 2016, while OPEC’s effective spare capacity would grow from 3.12 mb/d to 5.43 mb/d over the same period.

“Potential OPEC spare capacity remains tight in 2011 and 2012, but then eases back into a range between 5%-6% of global demand thereafter,” the IEA said. “This is hardly suggestive of a sloppy market, but it does hint that the supply side of the equation, barring major outages, is capable of matching trend demand growth at, or slightly above, 1 mb/d per year.”

Assuming 30% weaker global economic growth than the base scenario would generate more modest oil demand growth of 0.7 mb/d, giving 6-8 mb/d of spare capacity during 2013-2016, if upstream capacity continued to expand.

“Greater supply-side flexibility is welcome, although it would be a pity for it to come about largely because of suppressed economic activity,” the IEA commented.

“All told, the intense tightening in market fundamentals evident during 2009-2011 could ease over the next five years, the more so if 2012 economic growth takes a sharper downturn than our base case suggests,” it said.

However, significant supply risks remain, the agency cautioned, citing the tensions in Syria, Yemen and Sudan and the “spectre” of an embargo on Iranian oil exports, which is “likely to have a bullish impact, notably on inter-regional and sweet-sour price spreads.”

“There may therefore be a way to go before the sunny uplands of comfortable medium-term supply are reached,” it concluded.

Global oil demand growth has outpaced supply since economic recovery began in 2009, especially since the middle of last year. In its closer-term projections, the IEA slashed its projection for 4Q demand by 400 kb/d to 89.8 mb/d and for average 2012 demand by 200 kb/d to 90.3 mb/d, largely reflecting eroding economic prospects in Europe. Still, average demand would grow by 1.3 mb/d next year, nearly twice this year’s rise.

“The demand baseline has come in lower for 2011 and a marginally weaker economic prognosis persists into 2012, even if this is countered by slightly weaker assumed prices,” it explained.

Non-OPEC supply projections were revised down less, by only 200 kb/d in 4Q to 53.3 mb/d and by an average of 100 kb/d next year to 53.7 mb/d. As a result, next year’s average OPEC/stock call was trimmed by 100 kb/d to 30.2 mb/d (or to 29.8 mb/d to take account of “miscellaneous” balances.)

Total oil supply rose by 900 kb/d in November to 90.0 mb/d, thanks to fewer non-OPEC supply outages and a 620 kb/d increase in OPEC crude supply to a three-year high of 30.68 mb/d, with Saudi Arabia and Libya accounting for 80% of the increase. (Platts estimated the monthly rise in OPEC supply at 550 kb/d.)

OECD industry oil stocks declined in October by a “steep” 36.3 million barrels to 2.63 billion or 57.2 days of forward cover, the IEA estimated. The inventory deficit versus the five-year average widened to 61.9 mb from 40.0 mb in September. Preliminary data for November show a counter-seasonal 6.9 mb build.

“With OECD company inventory having trended below the five-year average since July, our own estimation is that stocks would oscillate in a fairly narrow range around the five-year ‘norm’ if OPEC output were sustained at November levels over the course of 2012,” it said.

“There is always plenty of money to be lost indulging in punditry ahead of an OPEC ministerial meeting” on December 14, it said. “Nonetheless, there seem to be growing analyst expectations that ministers might converge around expected 2012 crude demand as an aggregate production target for the year ahead. For our part, we will wait and see.”


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