Oil Market Re-balancing – 12/27/16

No one seems to know when the production cuts announced by OPEC will end the global oil glut. From the IEA and OPEC to Saudi Arabia and the U.S. government, the range of possible times for re-balancing to start is pretty wide.

According to the IEA, an adviser to 29 nations, a substantial reversal in the oversupply could occur within six months. The agency expects oil stockpiles will decline by about 600,000 barrels a day (b/d) in the next six months as curbs take effect and Russia implements the reduction it promised.

“Before the agreement among producers, our demand and supply numbers suggested that the market would re-balance by the end of 2017,” the Paris-based agency said in its monthly market report. “If OPEC promptly and fully sticks to its production target” and other producers cut as agreed, “the market is likely to move into deficit in the first half of 2017.”

That swing from surplus to deficit in the first half of 2017 would depend on OPEC and other producers following through on supply cuts. The stockpile declines will only occur if OPEC reduces supply enough to meet and maintain a target of about 32.7 million barrels a day, the agency said.

OPEC itself is less optimistic, saying its agreement won’t keep supply from exceeding demand until the second half of next year.

The Dec. 10 agreement between OPEC and non-members such as Russia and Kazakhstan “will accelerate the reduction of global inventories and bring forward the re-balancing of the oil market to the second half of 2017,” OPEC said in its monthly report.

The group said its own output climbed 150,800 b/d in November, as Nigeria and Libya restored some output. As a result, other nations will need to make deeper cuts than expected.

Khalid Al-Falih, energy minister of Saudi Arabia, was more vague, saying that he sees supply and demand aligning at some point in 2017 without any concrete prediction.

The EIA’s forecast is the most pessimistic of the lot; its latest market outlook on Dec. 6 projected that inventories will accumulate by an average 420,000 barrels a day next year.

While prices have climbed, traders are beginning to question how closely nations will comply with the deal, how long it will take to burn through the current inventory surplus, and how quickly shale oil will return to the market.

Behind the conflicting views on when the market will re-balance are differing estimates of global oil demand. OPEC sees total consumption averaging 95.6 million barrels a day in 2017, the EIA anticipates 97 million barrels a day, and the IEA predicts 97.6 million. Gaps between those estimates are near the size of the cuts in the deal itself.

Forecasting oil supply and demand on a global scale is difficult so don’t expect a clearer picture anytime soon.

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