The world is awash with oil after having built record stockpiles in recent months, and slowing demand growth, combined with resilient non-Opec supply, could worsen the glut well into next year, according to the International Energy Agency (IEA).
“Stockpiles of oil at a record three billion barrels are providing world markets with a degree of comfort,” the IEA said in a monthly report, adding brimming stocks offer an unprecedented buffer against geopolitical shocks or unexpected supply disruptions.
Oil prices have more than halved in the past 18 months with supply bolstered by US shale oil output and Opec’s refusal to cede market share.
The IEA said global oil supplies breached 97 million barrels per day (bpd) in October, up two million from a year earlier, as non-Opec output recovered from lower levels in the previous month.
Although lower oil prices will lead to a decline in US oil production next year, it will take months to clear the market’s glut, the IEA said.
“This massive cushion has inflated even as the global oil market adjusts to $50 per barrel. Demand growth has risen to a five-year high of nearly two million bpd... But gains in demand have been outpaced by vigorous production from Opec and resilient non-Opec supply – with Russian output at a post-Soviet record and likely to remain robust in 2016 as well,” the IEA said.
The stock overhang that first developed in the US due to soaring production has now spread across developed nations as well as China and India, the IEA said.
“This surplus crude provides some relief, with Opec’s spare production buffer stretched thin as Saudi Arabia – which holds the lion’s share of excess capacity – and its Gulf neighbours pump at near record rates,” the IEA said.
“The shock absorber provided by oil stocks is no longer restricted to just crude. As refineries ran flat out to meet soaring demand for gasoline in top consumers the US and China, distillate inventories ballooned as a consequence.”
High stocks could protect the market from a supply crunch if there be a lengthy spell of cold temperatures. “But the current forecast is for a mild winter in Europe and the US. If it turns out to be true, bulging stock levels will add further pressure and oil market bears may choose not to hibernate,” the IEA said.
Meanwhile, world demand growth is forecast to ease closer to a long-term trend of 1.21 million bpd in 2016 from a very high 1.82 million bpd this year.
“The impact of oil’s steep price plunge on end users is unlikely to be repeated, and economic conditions are forecast to remain problematic in countries such as China,” the IEA said.
The IEA said that despite the resilience of producers such as Russia, non-Opec supply is forecast to contract by more than 600,000 bpd next year.
US light tight oil, the driver of non-Opec growth, is expected to decline by 600,000 bpd next year, versus previous expectations of contraction by 400,000 bpd.
“Record-high output in Russia provides a partial offset. Russian producers are favouring developments that boost output in the near term, while the rouble’s depreciation and Russia’s oil taxation system are neutralising the impact of lower prices and spending curbs,” it said.