IEA Sees Greater Market Balance, but Iraq, Libya Could Cause Trouble

Even optimistic analysts worry that market improvements could turn on a dime.

The week leading into the U.S. July 4th celebrations kicked off on a guardedly optimistic note, with Paul Simons, deputy executive director for the International Energy Agency, telling CNBC that his agency recently forecast greater market equilibrium in the second half of 2017 and that "we will see some movement towards rebalancing."

However, he went on to say that supply and demand for 2018 could easily shift and prove worrisome for Organization of the Petroleum Exporting Countries (OPEC) and some non-members trying to restrain output:"There's quite a bit of uncertainty out there."

Simons remarks were accompanied by more talk that the U.S. shale boom is beginning to falter: Commodity Futures Trading Commission data shows that hedge fund wagers on West Texas Intermediate reached the highest level since August in the week ended June 27, after more than doubling in two months; but bearish bets increased at a much slower pace than the previous two weeks.

This is mirrored by Energy Information Administration numbers showing that output from American producers fell for the first time in 2017 in April and was 190,000 barrels lower than initially estimated.

This caused John Kilduff, a partner at Again Capital, to remark, "That slowdown was the prelude to what should be probably a pretty sizable net change in the position next week."

He added that the market may be seeing "the last breath" of a sell-off as it enters a period of short-covering.

But as is the case with a market that brings new meaning the term volatility, an equal number of developments suggest that even the low-key optimism of some experts could be dashed in the near future and render any chance of a lasting supply/demand rebalance remote at best.

An unnamed source told Bloomberg that Libya's oil production has climbed to over 1 million barrels per day (bpd) for the first time in four years, thus increasing the difficulty of OPEC and its fellow travelers to reduce oversupply via their extended output cuts.

Additionally, Iraq has made headlines again as a disruptive force, with Jabar al-Luaibi, that country's oil minister, stating on Monday that "Why should Iraq be deprived from increasing its production?

"Not to disturb or disrupt OPEC at all, or the prices, but it is our right to have our production that corresponds to our reserves."

He noted that "Iraq is a country that maybe in our life, or after our life, (will) definitely have reserves that will be equal to Saudi Arabia."

Of late, analysts have been reluctant to report any upbeat forecasts without acknowledging the enormous challenges lying in wait, for example: last week Callin Birch, an analyst at the Economist Intelligence Unit, predicted that the OPEC cuts "should be enough to bring the market more into balance," but he stressed that "this will only be enough to scratch the surface of ample global stocks."