It seems Iran has overestimated how quickly it can put its oil barrels back into circulation on global markets, and supply outages last month in neighboring Iraq and other OPEC nations are inadvertently accommodating the Islamic Republic’s gradual return, the International Energy Agency said Friday.
In its monthly oil-market report, the IEA argued prices may not be headed an immediate recovery, but, for the first time in months, signs of a bottoming-out process have emerged.
It said the Organization of Petroleum Exporting Countries and oil-exporters outside the group are preparing to discuss an oil-production cap, global demand expectations are holding up and the U.S. dollar is weakening, making it cheaper for foreign buyers to purchase dollar-denominated crude.
Plus, the IEA now believes low crude prices are “working their magic” on non-OPEC production, which it says will fall by 750,000 barrels a day this year, a steeper decline than its last forecast of 600,000 barrels a day.
“For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market may achieve the much-desired balance,” the IEA said. “It is clear that the current direction of travel is the correct one, although with a long way to go.”
The most significant development, and perhaps the most meaningful for the oil market, is happening in Iran. Last month, Iran’s crude-production grew by 220,000 barrels a day, and is still shy of the daily half-million barrels Iran has promised to pump quickly into the market. Iran expects to produce another million a day after that initial ramp up.
The expected production increase by Iran following the end of international sanctions in January is one of the heaviest market forces weighing on crude prices now, because it could easily disrupt the market’s natural rebalancing process this year. But if Iran comes up short because of trouble restarting its shut-in oil fields, it could be a manageable amount of oil, coming on at a manageable speed, for the oil market.
“Iran’s return to the market has been less dramatic than the Iranians said it would be,” the IEA said. “Provisionally, it appears that Iran’s return will be gradual.”
OPEC has long held it won’t make room for Iran by cutting production. But a series of unintended production outages in Iraq, Nigeria and the United Arab Emirates has, in fact, allowed Iran’s production burst in February to register as an overall decline in OPEC production.
Saudi Arabia didn’t increase its oil production, in keeping with speculation it will freeze its production near record levels alongside other big oil-exporting nations. Iraq lost 210,000 barrels a day after a reported sabotage of the northern pipeline that feeds crude to the Turkish port of Ceyhan, the IEA said.
The group’s combined output fell by 90,000 barrels a day last month to 32.61 million barrels a day – which is still “robust,” the IEA said.
Outside of OPEC, the United States is expected to give up 530,000 barrels a day in oil production this year and Brazil, Columbia and other non-OPEC producers are seeing sharper production declines, as well. “Higher cost producers are cutting output,” the IEA said.
Though the IEA has feared global demand might come in sharply lower than expectations given the economic slowdown in China and other emerging economies, it has held up. The Paris group, which advises oil-importing nations, said global demand is still expected to come in at 1.2 million barrels a day this year.
The IEA warned, though, that if crude prices keep rising, that could be a blow to demand. In China, it expects demand to grow at 330,000 barrels a day, which is a lower rate than the 10-year average of 440,000 barrels a day.
Oil inventories climbed by 20 million barrels in January. The IEA expects the oil-market surplus of supply over demand to be 1.9 million barrels a day in the first quarter and 1.5 million barrels a day in the second quarter. In the second half of the year, it should be just 200,000 barrels a day, the IEA said.