IEA says world ‘drowning’ in oil, prices could go lower

Oil markets will face oversupply of at least one million barrels a day for the third year in a row, according to a report by energy forecaster the IEA.

Oil prices changed the direction again on Tuesday, returning closer to fresh multi-year lows, after last week’s decision to lift sanctions on Iran added to the woes of weak demand and worries over the worsening global oversupply.

Brent price will average $40 a barrel in 2016 and $50 a barrel in 2017, while WTI price will average $38.54 a barrel this and next year respectively, according to the forecasts of the U.S. Energy Information Administration (EIA).

For much of previous year, the falling oil price was viewed as a benefit for the global economy because it cut costs for most companies and increased consumers’ spending power.

Warm early-winter temperatures in Europe, Japan and the United States and economic gloom in China, Brazil, Russia and other commodity producers caused a sharp reversal in the oil market past year.

Iran OutputIran’s oil ministry gave directions to increase output by 500,000 barrels a day after global sanctions were lifted, the country’s news agency Shana said. That will lead to “enormous strain” on the system’s ability to absorb the pressure, it said.

USA crude futures were up 34 cents at $29.76 a barrel, maintaining their unusual premium over Brent. “It seems to be a healthy upside correction in an otherwise downtrending market”, said Tamas Varga, oil analyst at London brokerage PVM Oil Associates.

The monthly oil market report of the International Energy Agency raised a question, “Can it go any lower?” It traded as high as $US30.24, rebounding from $US27.67 on Monday, its lowest since 2003. The IEA believes that by the end of the first quarter, around 300,000 barrels a day of additional crude oil could be flowing to world markets.

“Before large volume exports can begin, Iran will have to set up new oil sales contracts above those already in place”, BMI Research said in a market commentary.

In addition, dollar strength will make oil imports more expensive for many countries, further dampening demand, the IEA said.

The IMF report was finalised before crude prices fell some 22% in the first two weeks of the year as traders prepared for Iran to return to the global market. Foreign investment could push daily production to four million barrels by the end of the decade, the IEA said.

Global oil supplies expanded by 2.6 million bpd past year, following hefty gains of 2.4 million bpd in 2014.