International Energy Agency (IEA) warns of more oil price volatility

The rebalancing of the oil market triggered by the collapse in prices has yet to run its course and it would be a mistake to assume it will proceed smoothly, the International Energy Agency has warned.

“On the face of it the oil price appears to be stabilising. What a precarious balance it is, however,” the energy watchdog said on Friday in its monthly oil market report.

After peaking above $110 a barrel in June 2014, oil prices have fallen by more than 50 % as rising supplies overwhelmed tepid global demand. Opec’s decision in November not to cut production to support prices also weighed on the market.

Brent, the international crude marker, fell to $45 a barrel in January but has since rebounded on the back of news pointing to a pullback in drilling, investment and supply disruptions in oil producing countries. In Monday trading, Brent stood at under $55 a barrel.

But in its report the IEA said booming US supply, which in large part has driven the oversupply in the oil market, has yet to take a hit from weaker prices.

“Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down,” the report said. Quite to the contrary, it continues to defy expectations.”

Total US production averaged 12.6m barrels a day in February, up from its 2014 average of 11.8m b/d.

But the IEA said US crude stocks, which are at record levels, “may soon test storage capacity limits” and this could lead to renewed price weakness and “trigger the cuts that have so far remained elusive”, the IEA said.

Total US production — which includes crude and natural gas liquids — is expected to abate in the second half of this year and is forecast to grow at 12.6m b/d on average in 2015, which is up 760,000 b/d compared with the year before. Although sizeable, this “pales in comparison” to the rise of 1.6m b/d in 2014, the IEA said.

Global supply rose by 1.3m b/d to 94m b/d in February compared with the prior year. This was led by a 270,000 b/d gain in non-Opec production to 57.3m b/d, which coincided with a 90,000 b/d pullback in Opec crude supply to 30.22m b/d. Losses in Libya and Iraq offset higher supply from other countries.

Demand for crude oil and refined products, such as gasoline or diesel, has been supported by opportunistic buyers and those traders with a keen interest in storage plays. Refiners are benefiting from higher margins.

“Tentative signs of a demand recovery have emerged with the turn of the year, with a heavy emphasis reserved for the word ‘tentative,” the IEA said.

It added: “There are still few firm signs at this stage that lower prices are giving the economy a real boost. China, for one, remains in cooling mode.”

The IEA’s higher demand growth forecast saw the agency raise its “call” on Opec crude for the second half of 2015 to 30.3 mb/d, above the group’s official 30m b/d target.

Opec — particularly Saudi Arabia, its largest producer and effective leader — has sought to maintain market share amid growing supply from non-Opec rivals.

A period of lower prices as dictated by the market, would put pressure on higher cost producers from the US, to Brazil and Russia and work in favour of Opec.