IEA Predicts Supply Deficit But Warns That Next Few Weeks Are "Crucial" For Those Supporting OPEC Cutback Deal

IEA says the oil deal might not be fully implemented.

Dismissed in many analytical circles as ineffective, the Organization of the Petroleum Exporting Countries (OPEC) cutback deal could have a dramatic effect on the global oil market's demand/supply balance, switching from the surplus that has been building for the last few years to a relatively sudden deficit in the first half of next year, says the International Energy Agency (IEA).

One reason for the predicted deficit is that the IEA in a new report increased its forecast for global oil demand for this year and next year due to revised estimates for Russian and Chinese demand: a growth of 1.4 million barrels per day (bpd) for 2016, which is 120,000 bpd above the agency's previous forecast.

The IEA now believes growth in 2017 will be 1.3 million bpd, or 110,000 bpd more than its previous estimate.

The output cut also prompted the agency to forecast non-OPEC 2017 oil supply growth to be only 220,000 bpd, a reduction of 255,000 bpd, and it thinks OPEC supplies will fall by almost 900,000 bpd to 56.8 million bpd.

However, the report stresses that the next few weeks will reveal whether OPEC members and non members are serious about fully implementing the agreed-upon 1.2 million bpd cut, and therefore this will be a crucial period for oil prices.

It conceded, "For contractual and logistical reasons, we might initially see that the output cuts do not fall neatly into place.

"The deal is for six months, and we should allow time for it to be implemented before re-assessing our market outlook; success means the reinforcement of prices and revenue stability for producers after two difficult years, [and] failure risks starting a fourth year of stock builds and a possible return to lower prices."

Additionally, the IEA warned that high-cost oil producers should not count on more stable prices much beyond 2017: "These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments."

Even though skepticism persists among analytical circles about the viability of the cutback deal, Neil Atkinson, head of the oil industry and markets division at the IEA, stresses that it was in the "mutual interest" of OPEC and non-members to reach such an agreement: "We know the financial situation of many of the producers is fairly challenging whether they are OPEC and non-OPEC."

Still, Barclays analysts said in a note earlier this week that "There are too many moving parts for OPEC's new policy to be sustainable in the long term: the strategy is bound to overshoot in our view, leading to lower prices in the second half of next year."