Oil finally coming out of a ‘long, dark tunnel’— IEA

15 March 2016, Lagos – Nigeria’s hope of seeing the price of oil increase in the near future may not be too far, if the report of the International Energy Agency, IEA, is anything to go by.

CRUDE-OILThe IEA in its latest report said the price of oil may finally have bottomed out in the global oil market.

Oil prices have crashed from highs of more than $100 a barrel in mid-2014, to as low as $27 in January, wiping out more than 70 percent of the commodity’s value.

But prices have started to recover over the past month, this week passing above $40 a barrel for the first time in 2016. The IEA said this slight recovery points to oil “bottoming out” and finally ending its run of long-term losses.

“It is clear that the current direction of travel is the correct one, although with a long way to go,” the Oil Market Report said.

The report attributes the slight price recovery to several factors, including the output freeze agreed by OPEC members in February and Iran’s slower-than-expected re-entry into the global market since international sanctions against the country were lifted in mid-January.

Before the lifting of sanctions, it was predicted that Iran could increase production by as much as 500,000 barrels per day, bpd, making the oil market more saturated than ever before. But that huge increase hasn’t materialised, with the country increasing production by just 220,000 bpd in February. The IEA said Iran’s return to the market will continue to be “gradual.”

The IEA said supply disruptions in Iraq, Nigeria and the United Arab Emirates, steady demand for oil and recent weakness of the dollar were other reasons favouring expectations of a price upturn.

Also, there are signs that high-cost producers, including of US shale oil, are lowering output as they can’t cover their costs because of oil price weakness.

Consequently, the IEA has lowered its output target for the US, Brazil and Colombia. The amount of oil being produced worldwide also fell in February. “Global oil supplies eased by 180,000 barrels per day (180 kb/d) in February, to 96.5 million barrels per day (mb/d), on lower OPEC and non-OPEC output,” the report said.

It also pointed out that production had increased by 1.8 million bpd year-over-year. The month-on-month fall, however, has been a big contributor to oil’s gains in recent weeks.

While the IEA struck a reasonably optimistic tone in the report, it wasn’t all smiles, and it urged caution on oil’s potential recovery, saying the recent recovery shouldn’t “be taken as a definitive sign that the worst is necessarily over” when it comes to oil. The report also argued that there was still a long way to go before balance returns to the markets, but it said balance should return in 2017.

“The foundations for global demand growth are sound, but not rock-solid,” it said. The IEA’s guarded optimism flies in the face of the gloomy tone struck by many of the world’s big banks.

In the past week, numerous financial institutions have come out to argue that the recent recovery in the price of oil will not last and that the commodity will stay weak in the long term.

However, Norbert Ruecker, the head of commodities research at the Swiss private bank Julius Baer, said the company “still believes that oil prices experience a short-term bounce but no long-term recovery,” while analysts at Barclays said market optimism was “somewhat premature.”

 

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