A record surplus in U.S. crude inventories may soon strain the nation’s storage capacity, renewing a slump in prices and curbing its output, according to the International Energy Agency.
The IEA boosted estimates for U.S. oil production this year as cutbacks in drilling rigs have so far failed slow its output. Crude inventories threaten to fill tanks, with the nation’s largest oil-storage hub in Cushing, Oklahoma 70 percent full, the agency said. The IEA raised its 2015 estimate of global oil demand by the most since it was introduced in July.
“Stocks may soon test storage capacity limits,” said the Paris-based adviser to 29 nations in its monthly market report. “That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive.”
Oil has rallied about 20 percent in London over the past two months as U.S. drillers idled an unprecedented number of rigs in response to the biggest price collapse since 2008. Crude slumped 61 percent from June to January after OPEC signaled it would leave shale producers and other suppliers to deal with a global glut.
West Texas Intermediate crude, the U.S. benchmark, fell $1.69, or 3.6 percent, to $45.36 a barrel at 11:17 a.m. on the New York Mercantile Exchange. Brent, the international benchmark, dropped $1.02 to $56.06 a barrel. Both grades are heading for weekly declines.
“The market moved lower on the back of the report,” Ole Hansen, an analyst at Saxo Bank A/S, said by e-mail from Copenhagen. “Continuing inventory builds are keeping the focus on whether storage may fill up. It’s becoming increasingly clear that, barring any major geopolitical event, the risks are pointing to lower oil prices.”
U.S. oil supply will expand this year by about 750,000 barrels a day to 12.56 million a day, up from a projection of 12.41 million in last month’s report. The agency boosted estimates for North American output in the fourth quarter of 2014 by a “steep” 300,000 barrels a day. The production forecasts include natural gas liquids and condensate, according to the IEA.
“While the U.S. supply response to lower prices might take longer to kick in than expected, it might also prove more abrupt,” the agency said.
The nation held 468 million barrels of oil in storage at the end of January, a record 72 million higher than the five-year average, the IEA said. The stockpile number includes U.S. territories such as Puerto Rico, Virgin Islands, and Guam, according to the IEA. Cushing stocks continued to increase steadily in February to 49.2 million barrels by the end of the month.
“What’s negative about the report is that supply is still growing at a solid pace,” Giovanni Staunovo, an analyst at UBS AG in Zurich, said by e-mail. “Demand was raised moderately.”
The agency increased forecasts for global oil consumption in 2015 by 130,000 barrels a day because of “modestly escalating global economic growth.” Demand will rise this year by 1 million barrels a day, or 1.1 percent, to an average of 93.5 million a day.
Much of the improvement in demand has been driven by refiner profits and purchases of crude to keep in storage, rather than an increase in fuel use by consumers, the agency said. China, the world’s second-biggest oil user, “remains in cooling mode.”
The gain in global demand means that the level of crude needed from the Organization of Petroleum Exporting Countries will be 100,000 barrels a day higher than previously thought. That reduces the surplus caused by the group’s current over-production.
OPEC’s 12 members will need to provide an average of 29.5 million barrels a day in 2015, compared with the 30.22 million they pumped in February. Group production slipped by 90,000 barrels a day last month as losses deepened in Libya and Iraq. Saudi Arabia, OPEC’s biggest member, raised output to 9.74 million barrels a day from 9.69 million.
The average amount needed from OPEC in the second half of the year, at 30.3 million barrels a day, is both higher than current production and the organization’s official target of 30 million barrels.
“The global supply and demand balance definitely looks tighter in the second half,” Olivier Jakob, managing director at consultants Petromatrix GmbH, said by e-mail from Zug, Switzerland.