Oil supply seen outpacing demand, capping price

According to the IEA’s monthly report, OPEC’s current production rose by 280,000 barrels a day in January to 32.63 million barrels a day. Saudi Arabia, Opec’s biggest member and de facto leader, boosted production by 70,000 barrels a day to 10.21 million.

EIA assumes that a collaborative production cut among OPEC members and other major producers does not occur in the forecast period, as major OPEC producers continue the strategy to maintain market share. Non-OPEC production likely to drop by 600,000 barrels in 2016 but that would be compensated by similar increase from Iran.

Therefore, even under the above mentioned scenario of lower gap between supply and demand in H2 2016, it’s hard to see oil prices climbing much higher than the $40 a barrel.

Leonard Brecken, an economist with Oil Price, said in an article submitted to ZeroHedge today that in addition to the global oversupply from OPEC, he believes computerized trading is creating oil price volatility, noting that through his research “we are certainly in an era of extreme asset price distortion, driven by central banks and new methods of computerized investing”. Nigeria’s gain was biggest, adding 74,000 barrels to reach 1.87 million barrels a day.

United States benchmark West Texas Intermediate for March delivery was up 48 cents, or 1.72%, at $28.42 and Brent crude for April climbed 50 cents, or 1.65%, to $30.82.

“Continuing increases in global oil inventories are expected to keep oil prices under $40 a barrel through August”, said Adam Sieminski, EIA administrator, in a statement.

Phillip Futures analyst Daniel Ang also said Wednesday’s price rebound was helped by the reopening of some regional markets after the Chinese New Year break.

Because of overproduction chiefly by Saudi Arabia and non-OPEC producers, there is now up to 2.5 million bpd of excess oil in the market which has caused crude prices to lose around 60% of their value since mid-2014. Early elements of the projected slowdown surfaced in Q4 2015.

The organisation, which supplies more than one in three barrels of oil consumed globally, lowered its 2016 global growth forecast to 3.2 per cent from 3.4 per cent. “For 2016 as a whole, non-OPEC output is expected to decline by 0.6 mb/d, to 57.1 mb/d”, IEA said. “It is Opec’s business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low, “. Iran has raised generation ahead of sanctions and preliminary data indicated that the dispatches of Saudi Arabia had raised.

Low oil prices have spurred global demand but it was not enough to absorb all crude produced. “Perhaps resilience still has some way to go”, suggested IEA.