Oil market could ‘drown’ in oversupply, IEA warns

The IEA trimmed 2016 estimates for global oil demand as China’s economic expansion weakens, and raised forecasts for supplies outside the Organization of Petroleum Exporting Countries.

“Clearly, what is happening is that markets are continuing to be quite anxious about the possibility that we will see Iran bring back quite a bit of oil”, Bart Melek, the head of commodity strategy at TD Securities in Toronto, said in a telephone interview. It’s not as if auto owners will suddenly drive additional carpools with oil prices low.

Iran is poised to make a bid for European markets, offering cut price competitive deals after being shut out of the continent for more a decade under its sanctions regime, said the report.

Brent crude futures, the global benchmark, traded up $1.09, or 3.8%, at $29.64 a barrel.

Oil prices have fallen more than 70% in the past 18 months as exporters around the world pump over a million barrels of crude every day in excess of demand.

Production from OPEC, whose membership expanded last month with the return of Indonesia, slipped 90,000 barrels a day to 32.28 million a day in December amid slightly lower output from Saudi Arabia and Iraq, according to the report.

Barclays analysts Alia Moubayed and Michael Cohen wrote in a research note to investors that the anticipated ramp-up in Iranian production comes “at a very bad time” for the oil market given the existing pressure on prices.

Analysts also attributed much of Brent’s bounce from under $28 a barrel on Monday to a brief short-covering rally after oil prices crashed over 20 percent this year, triggering a record volume of short positions in the week through January 12. It said the result would be the third successive year when supply exceeded demand by 1m barrels a day, and the system would struggle to cope.

The answer from the International Energy Agency is an “emphatic yes”.

“The run up to this weekend’s announcement has likely contributed to the recent decline in oil prices”, Goldman Sachs said.

OPEC believes the demand for its crude will be 31.6 million bpd in 2016, or 1.7 million barrels higher than 2015; it also notes that despite China’s economic woes, oil demand in that country is still expected to grow 290,000 bpd this year to average 11.13 million bpd. Economists say lower oil prices are, for the global economy, a positive thing. Demand more than halved from 2.1m barrels a day in the third quarter, near a five-year high, to a year low of 1m barrels a day in the final quarter.

Iran unveiled a new model of oil contracts in November aimed at attracting foreign investment in anticipation of the lifting of sanctions.