IEA Now Says OPEC Must "Dig In For The Long Haul" To Alleviate The Global Oil Glut

Wednesday August 16, 2017

In what appears to be a contradictory message just one day after it predicted that the crude market will return to the desirable five year average in early 2018, the International Energy Agency on Tuesday said the Organization of the Petroleum Exporting Countries (OPEC) won't be able to clear up the global supply glut any time soon.

Neil Atkinson, head of the agency's oil markets and industry division, told Bloomberg, "If they wish to achieve the reduction of oil stocks down to the five-year average, they're going to have to dig in for the long haul," and he added that any increase in price they may achieve will bolster U.S. shale production and exacerbate the glut.

On Monday, the IEA upwardly revised its global demand forecast, and Atkinson said that although American production presents a problem for an even supply and demand balance, if OECD stocks continue to fall at rates seen earlier this year then a meaningful balance would be achieved early next year.

Atkinson's seeming change of heart notwithstanding, all parties agree on one thing: OPEC faces an uphill battle in achieving any sort of gains on production cutbacks: Bloomberg notes that both Total SA and Weatherford International Plc believe a reasonable crude market might not return until the end of the decade.

Sarah Emerson, energy principal at ESAI, remarked, "If OPEC wants to keep oil prices in the $50s and hit $60, the organization will have to keep a lid on supply for several more years."

Ed Morse, global head of commodities research at Citigroup, told Bloomberg, "The OPEC position even with Russia is really not sustainable overt a long period of time, they're losing revenue by doing what they've done," and the U.S. producers "can survive at a lower price."

As for the notion the Permian basin reserves are depleting and exploration focus must shift elsewhere, Morse said, "there's a lot more oil there than people thought, there's a lot more years of oil there than people thought, and what we've seen is a hiccup," and he added than the larger than anticipated gas contained in the region is still valuable.

Meanwhile, BMI Research in a new report wondered how supplies curbed by the cartel will be returned to the market when the cutback deal expires next year; it also doubted that market sentiment will return to "bullish extremes" and said Brent is vulnerable to short-term pullbacks over the coming months.

Earlier this week, another assumption many analysts were relying on to support their forecast of a recovering crude market proved questionable when weaker than anticipated demand from China was reported in the form of refineries processing only 10.71 million barrels per day (bpd) in July, down 500,000 bpd from June.