Oil Glut to Stay in 2016 as IEA Sees Slower Demand Growth

Is the Crude and Commodities Relief Rally for Real?
  • Demand outlook `markedly softer' in 2016 on weaker growth
  • Oil price erases gains in New York after agency's report

Global oil markets will remain oversupplied next year as demand growth slows and Iranian exports are poised to recover with the lifting of sanctions, the International Energy Agency said.

While supplies outside OPEC will decline in 2016 in response to lower prices, demand growth will ease from this year’s five-year high amid a weaker outlook for the world economy, allowing the crude surplus to endure, the IEA predicted. Iran could swell the glut if restrictions on its sales are removed with the completion of a nuclear accord, while Iraq has replaced the U.S. as the biggest source of new supplies as its output reaches record levels.

“The market may be off balance for a while longer,” the Paris-based adviser to 29 nations said in its monthly report. “A projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels -- should international sanctions be eased -- are likely to keep the market oversupplied through 2016.”

Oil rallied above $50 a barrel in New York last week for the first time since July amid expectations that a slump in U.S. drilling and cutbacks in investment will help whittle away the global supply glut. The advance has stalled as OPEC members boost production, China’s economy shows signs of slowing and U.S. oil output remains elevated.

Global demand growth will revert to long-term trend levels of 1.2 million barrels a day in 2016, down from 1.8 million this year, amid a softer economic outlook for oil producers such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. Consumption worldwide will average 95.7 million barrels a day next year, about 100,000 a day less than projected in last month’s report.

“The demand outlook for 2016 looks markedly softer” because of “downgrades to the macroeconomic outlook and expectations that crude oil prices will not repeat the heavy declines seen in 2015,” according to the report.

Oil prices pared gains after the report, sinking to a one-week low of $46.60 a barrel in New York.

Iran, which plans to revive exports if an agreement on its nuclear program with world powers is completed, could boost output to 3.6 million barrels a day from its current 2.9 million, the agency estimated. This could be added in six months and almost double the increase in oil inventories projected for next year, the IEA said.

Iraq Supply

Record output from Iraq pushed supplies from the Organization of Petroleum Exporting Countries higher in September, according to the report. The Middle East nation raised production by 130,000 barrels a day to 4.3 million. Still, “severe budgetary strain and ongoing issues with security and infrastructure are likely to limit supply growth in the near term,” the IEA said.

Output from OPEC’s 12 members increased by 90,000 barrels a day to 31.72 million in September, the highest since July, according to the report. Production from Saudi Arabia, while slightly lower than August at 10.2 million barrels a day, remained above 10 million for a seventh straight month.

While the agency boosted estimates for 2016 non-OPEC supply, amid stronger-than-expected output from Russia, Brazil and Canada, it will still contract sharply next year. Total supply from nations outside OPEC will decline by 500,000 barrels a day, which the IEA said last month was the steepest drop since 1992. U.S. oil output will fall to 12.56 million barrels a day in 2016, from 12.75 million this year.

“Non-OPEC supply growth is disappearing fast,” the agency said. “Much of the slowdown is in the U.S.”

Despite signs that output will ultimately falter, global markets remain oversupplied. Oil inventories in developed nations expanded in August by double the normal amount, leaving them 204 million barrels above the seasonal average, the IEA said.

“The IEA stands out as more bearish on the outlook” than OPEC and the U.S. Energy Information Administration, Jens Naervig Pedersen, an analyst at Danske Bank A/S, said in a report. “Global growth concerns should limit upside above the current range” in oil prices, he said.