Oversupply
The reintroduction of Iran into the market, is not however, the only challenge facing global oil markets.
According to the IEA, in the final quarter of 2015, global demand for oil fell to 1m barrels per day, from levels close to a five year high of 2.1m barrels per day in the third quarter. And, looking forward to 2016, the agency expects demand growth to moderate to 1.2m barrels per day.
In contrast, supplies continued to expand, up by 2.6m barrels per day in 2015, which followed a 2.4m barrel day increase the previous year. And, it added, while OPEC crude output fell by 90,000 barrels per day over the course of December, with the addition of Iran, it expects around 300,000 barrels a day of additional crude to enter the market by the end of the first quarter of 2016.
“We conclude that the oil market faces the prospect of a third successive year when supply will exceed demand by 1.0 mb/d and there will be enormous strain on the ability of the oil system to absorb it efficiently,” the IEA said.
Adding: “Nor can we expect other Middle East producers to stay on the sidelines; their regularly stated policy is to protect market share and allow the price to find its level. Saudi Arabia’s sharp increase in domestic fuel prices is a sign that OPEC’s top producer is preparing for a long period of lower prices.”
Where to from here?
Norbert Ruecker, head of commodities research at Julius Baer, agrees that production might not be as strong as Iran hopes but believes the news will likely continue to weigh on prices, which, he says could well test the low 20s in a bear-case scenario.
And, while he adds that the steeply upward sloping futures curve implies that the market already anticipates Iran’s return and a significant swelling of global inventories, “The oil market is seemingly facing its final washout while transitioning into a new normal.”
Natixis Asset Management’s commodity team is even more bearish.
“Examining the data in greater detail, these revisions make the situation for 2016 worse than before, with the market excess failing to reduce as it was forecast last month,” the firm said in a note out following the release of the IEA report. “This excess is likely to average 1.38m b/d in 2016 . This excess will lead to stock building leading to global oil and oil products stocks in OECD countries close to 3bn barrels.”
As a result Natixis has revised its annual average for Brent Crude down by $4/barrel, to $35.5/barrel and by $9/barrel in 2017 to a price of $46/barrel. Its forecasts for WTI were also lowered to $34.3/barrel in 2016 and $44/barrel in 2017.
